The impact of macroeconomic and monetary policy shocks on credit risk in the euro area corporate sector

Marco Lo Duca, Diego Moccero and Fabio Parlapiano

No 2897, Working Paper Series from European Central Bank

Abstract: We analyse the impact of macroeconomic and monetary policy shocks on corporate credit 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 (LP). For the period 2014-19, we find that aggregate shocks significantly affect the dynamics of credit risk. An adverse supply shock leads to a deterioration of firms’ riskiness 10 per cent above the average PD. Contractionary monetary policy shocks exert similar, but delayed effects. 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 aggregate shocks, but the accumulation of cash reserves helps building resilience. JEL Classification: C23, C55, E43, E52, G33

Keywords: corporate credit risk; local projections; monetary policy shocks; probabilities of default; structural demand and supply shocks (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac, nep-mon and nep-rmg
Note: 452517
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242897

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