Firm financial conditions and the transmission of monetary policy

Thiago R T Ferreira (), Daniel A Ostry () and John Rogers
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Thiago R T Ferreira: Federal Reserve Board
Daniel A Ostry: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1093, Bank of England working papers from Bank of England

Abstract: We re-examine how financial frictions shape the transmission of monetary policy using firms’ excess bond premia (EBPs), the risk premium component of credit spreads. While monetary policy easing shocks compress credit spreads more for higher-EBP (riskier) firms, lower-EBP firms’ investment responds more. Further, credit supply shocks replicate monetary policy’s heterogeneous effects, whereas credit demand shocks elicit homogeneous firm responses. A model with financial frictions in which lower-EBP firms have flatter marginal benefit curves for capital rationalises firms’ price and quantity reactions to these three shocks. In contrast, previously examined channels, while complementary, are inconsistent with our more comprehensive set of empirical moments.

Keywords: Monetary policy; investment; credit spreads; excess bond premium; firm heterogeneity; credit supply; risk premium. (search for similar items in EconPapers)
JEL-codes: E22 E44 E50 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2024-09-06
New Economics Papers: this item is included in nep-mon
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Related works:
Working Paper: Firm Financial Conditions and the Transmission of Monetary Policy (2023)
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