Monetary policy under multiple financing constraints

Yannick Timmer, Alejandro Van der Ghote and Ander Perez-Orive

No 3217, Working Paper Series from European Central Bank

Abstract: We revisit the credit channel of monetary policy when firms face multiple financing constraints, a common feature of corporate financing we document empirically. Our theory shows that the multiplicity of constraints dampens the transmission of expansionary policy to firm borrowing and investment notably but amplifies the transmission of policy tightening. This asymmetry arises because, when policy tightens (eases), the most (least) responsive constraint binds. Using U.S. firm-level data and exploiting a quasi-natural experiment, we find strong support for these predictions and for our proposed channel. Embedding the mechanism into a New Keynesian framework, we find that the drop in investment after contractionary shocks is twice as large as its increase following equally-sized expansionary shocks, thus providing an explanation for why monetary policy tightenings have stronger effects than easings, a longstanding puzzle in monetary economics. Moreover, our analysis implies that the effectiveness of monetary policy is strongly determined by the distribution of financial constraints across firms and that similar asymmetries likely characterize the transmission of other macroeconomic shocks. JEL Classification: D22, D25, E22, E44, E52

Keywords: asymmetry; financial frictions; firm heterogeneity; investment; monetary policy (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
Note: 2828013
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3217~e43de9be7f.en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263217

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().