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The Bond Lending Channel of Monetary Policy

Olivier Darmouni, Oliver Geisecke and Alexander Rodnyanky

MPRA Paper from University Library of Munich, Germany

Abstract: An increasing share of firms' borrowing occurs through bond markets. We present high-frequency evidence from the Eurozone that bond-reliant firms are more responsive to monetary shocks: in contrast to standard bank lending channel predictions, unexpected ECB policy changes affect their stock prices by more, even conditional on total debt and industry fixed-effects. We develop an organizing framework to decompose the stock price, credit risk and investment response of large firms. We emphasize the role of corporate liquidity management: firms react to rate hikes by being prudent in good times, reducing investment in favor of hoarding liquid assets. Since bond financing is less flexible in bad times than relationship banking, this effect can rationalize why the mix of bank and bond financing matters for monetary transmission. A mitigating force is that bonds generally have longer duration and lower interest-rate pass-through relative to loans. Our findings suggest that the recent global growth in bond debt following quantitative easing could interact with conventional interest rate policy going forward.

Keywords: Monetary policy; ECB; Debt Structure; Bank loans; Corporate bonds (search for similar items in EconPapers)
JEL-codes: E44 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: The Bond Lending Channel of Monetary Policy (2020) Downloads
Working Paper: The Bond Lending Channel of Monetary Policy (2020) Downloads
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