Corporate leverage and the effects of monetary policy on investment: A reconciliation of micro and macro elasticities

Valentin Grob and Gabriel Züllig ()

No 24-04, IRENE Working Papers from IRENE Institute of Economic Research

Abstract: We investigate how the level of corporate leverage affects firms' investment response to monetary policy shocks. Based on novel aggregate time series estimates, leverage acts amplifying, whereas in the cross section of firms, higher leverage predicts a muted response to monetary policy. We use a heterogeneous firm model to show that in general equilibrium, both empirical findings can be true at the same time: When the average firm has lower leverage and therefore reduces its investment demand more strongly after a contractionary shock, the price of capital declines sharply, which incentivizes all firms regardless of their leverage to invest relatively more, muting the aggregate decline of investment. We provide empirical evidence supporting this hypothesis. Overall, if there are general equilibrium adjustments to shocks, effects estimated by exploiting cross-sectional heterogeneity in micro data can differ substantially from the macroeconomic elasticities, in our example even in terms of their sign.

Keywords: firm heterogeneity; state dependence; financial frictions; general equilibrium (search for similar items in EconPapers)
JEL-codes: D22 E32 E44 E52 (search for similar items in EconPapers)
Pages: 72 pages.
Date: 2024-09
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www5.unine.ch/RePEc/ftp/irn/pdfs/WP24-04.pdf (application/pdf)

Related works:
Working Paper: Corporate leverage and the effects of monetary policy on investment: a reconciliation of micro and macro elasticities (2024)
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:irn:wpaper:24-04

Access Statistics for this paper

More papers in IRENE Working Papers from IRENE Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Siwar Khelifa ().