The Bond Lending Channel of Monetary Policy

Darmouni, Olivier and Geisecke, Oliver and Rodnyanky, Alexander (2019): The Bond Lending Channel of Monetary Policy.

Abstract

An increasing share of firms' borrowing occurs through bond markets. How does debt structure affect the transmission of monetary policy? We present a high-frequency framework that combines identified monetary shocks with a cross-sectional firm-level stock price reaction. An envelope argument shows that, since firms maximize equity value subject to constraints, stock price reactions reflect how monetary policy affects constraints. We find that, contrary to standard bank lending channel predictions, bond financing does not attenuate monetary transmission in the Eurozone: firms with more bonds are more affected by surprise monetary tightenings relative to other firms. This is consistent with significant bond-specific frictions that limit the benefits of disintermediation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy, ECB, Debt Structure, Bank loans, Corporate bonds
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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