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Corporate Leverage and Monetary Policy Effectiveness in the Euro Area

Simone Auer (), Marco Bernardini () and Martina Cecioni ()

No 1258, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study the relationship between corporate leverage and the sensitivity of industrial production to monetary policy shocks within the euro-area manufacturing sector. Using polynomial state-dependent local projections, we document a non-linear association. When leverage is low, more indebted industries adjust their production more strongly in response to a monetary policy shock, consistently with a financial accelerator framework. At higher leverage ratios, this positive relationship weakens until it reaches a point where additional leverage is associated with a decrease in sensitivity to monetary policy. We show that this weakening effect is particularly intense within the short-term horizon and in recessions. Our results are consistent with recent studies analyzing the role of default risk in dampening the financial accelerator mechanism.

Keywords: financial heterogeneity; monetary policy; polynomial state-dependent local projections; high-frequency shocks; panel data (search for similar items in EconPapers)
JEL-codes: C23 E32 E52 G32 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Related works:
Journal Article: Corporate leverage and monetary policy effectiveness in the euro area (2021) Downloads
Working Paper: Corporate Leverage and Monetary Policy Effectiveness in the Euro Area (2019) Downloads
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