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Corporate Leverage and Monetary Policy Effectiveness in the Euro Area

Simone Auer (), Marco Bernardini () and Martina Cecioni ()

No 1102, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Using country-industry level data and high-frequency identified monetary policy shocks, we find evidence of a positive but non-linear relationship between corporate leverage and the effectiveness of monetary policy in the euro area. More leveraged industries tend to increase their production more strongly after an expansionary monetary policy shock, pointing to a non-negligible role of financial frictions in the transmission mechanism. However, at high leverage ratios this positive relation becomes weaker and eventually inverts. This finding is consistent with recent theoretical studies arguing about the role of credit risk in dampening the financial accelerator channel.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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