Granular shocks to corporate leverage and the macroeconomic transmission of monetary policy

Fédéric Holm-Hadulla and Claire Thürwächter

No 2891, Working Paper Series from European Central Bank

Abstract: We study how shocks to corporate leverage alter the macroeconomic transmission of monetary policy. We identify leverage shocks as idiosyncratic firm-level disturbances that are aggregated up to a size-weighted country-level average to generate a Granular Instrumental Variable (Gabaix and Koijen, forthcoming). Interacting this instrumental variable with high-frequency identified monetary policy shocks, we find that transmission to the price level strengthens in the presence of leverage shocks, while the real effects of monetary policy are unaffected. We show that this disconnect can be rationalized with an internal devaluationchannel. Economies experiencing an increase in leverage exhibit a stronger monetary policy-induced contraction in domestic demand. This, however, is counteracted by a weaker contraction in exports, facilitated by their improved price competitiveness. JEL Classification: C36, E22, E52

Keywords: corporate leverage; granular instrumental variable; micro-to-macro analysis; monetary policy transmission (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mon
Note: 1624014
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242891

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