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, 2024). 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. A price-competitiveness channel rationalizes this disconnect. Economies where leverage increases exhibit a stronger monetary policy-induced contraction in domestic demand. This, however, is counteracted by a weaker drop in exports, supported by a relative decline in unit labor costs and unit profits, which in turn weighs on prices. 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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