How does the fed affect corporate credit costs? Default risk, creditor segmentation and the post-FOMC drift

Stefan Walz

Journal of Monetary Economics, 2024, vol. 143, issue C

Abstract: Surprise changes in monetary policy rates have a causal impact on credit risk measures, which display a significant post-FOMC drift. I employ a tight identification strategy to decompose the influence of firm-specific and creditor-specific factors across horizons. Firms with narrower income gaps and lower Tobin’s Q ratios exhibit heightened sensitivity at both short and long horizons. Bonds predominantly held by bond funds demonstrate only temporarily more sensitivity, indicating that credit market segmentation fails to account for the observed drift. Aggregate broker dealer capital scarcity is linked to an amplified response in the drift component. A large portion of the drift remains unexplained, revealing the limitations of cross-sectional characteristics in explaining the transmission mechanism.

Keywords: Monetary policy; Bond markets; Financial intermediation (search for similar items in EconPapers)
JEL-codes: E43 E50 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:143:y:2024:i:c:s0304393223001241

DOI: 10.1016/j.jmoneco.2023.10.008

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