Debt maturity heterogeneity and investment responses to monetary policy
Minjie Deng and
European Economic Review, 2022, vol. 144, issue C
We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.
Keywords: Monetary policy; Firm heterogeneity; Debt maturity; Financial frictions (search for similar items in EconPapers)
JEL-codes: E44 E52 G31 (search for similar items in EconPapers)
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Working Paper: Debt Maturity Heterogeneity and Investment Responses to Monetary Policy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:144:y:2022:i:c:s0014292122000393
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