The impact of macroeconomic and monetary policy shocks on the default risk of the euro-area corporate sector

Marco Lo Duca (), Diego Moccero () and Fabio Parlapiano ()
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Marco Lo Duca: ECB
Diego Moccero: ECB
Fabio Parlapiano: Bank of Italy

No 1460, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We analyse the impact of macroeconomic and monetary policy shocks on corporate default risk as measured by firms' probabilities of default (PDs) for the four largest euro area countries. We estimate the impact of shocks on one-year PDs using local projections. For the period 2014-19, we find that these shocks significantly affect the dynamics of default risk. A contractionary supply shock leads to a deterioration of firms' riskiness by 10 per cent above the average PD. Similar effects are found for adverse monetary policy shocks. Firms' responses to shocks vary depending on their characteristics and degree of financial constraints. Smaller firms are affected to a larger degree. Firms’ outstanding indebtedness and debt repayment capacity are an important transmission channel for these shocks, but the accumulation of cash reserves helps build resilience.

Keywords: corporate default risk; demand and supply-driven inflation shocks; monetary policy shocks; local projections (search for similar items in EconPapers)
JEL-codes: C23 C55 E43 E52 G33 (search for similar items in EconPapers)
Date: 2024-07
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