Does the cost of private debt respond to monetary policy? Heteroskedasticity-based identification in a model with regimes

Massimo Guidolin, Valentina Massagli and Manuela Pedio

The European Journal of Finance, 2021, vol. 27, issue 18, 1804-1833

Abstract: We investigate the effects of the Federal Reserve's quantitative easing and maturity extension programs on the yields of US dollar-denominated corporate bonds using a multiple-regime heteroskedasticity-based VAR identification approach. Impulse response functions suggest that a traditional, rate-based expansionary policy may lead to an increase in yields while quantitative easing is linked to a general and persistent decrease in yields, particularly for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost of private debt primarily through a reduction in risk premia that cannot be entirely accounted for by a reduction in corporate default risk.

Date: 2021
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Working Paper: Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity-Based Identification in a Model with Regimes (2021)
Working Paper: Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity-Based Identification in a Model with Regimes (2019)
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DOI: 10.1080/1351847X.2021.1917442

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