The Bond Lending Channel of Monetary Policy

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

Abstract

Given that an increasing share of firms' borrowing occurs through bond markets, we study how debt structure affect the transmission of monetary policy. We present a high-frequency framework that combines identified monetary shocks with cross-sectional firm-level stock price reaction. An envelope argument shows that firm-level stock market data is particularly informative: since firms maximize equity value subject to constraints, stock price reactions directly reflect how monetary policy affects constraints in the population of firms once we control for equity duration. We apply this idea to a sample of US and Eurozone public firms in 2001-07. In Europe, contrary to classical bank lending channel predictions, firms with more bank debt are less affected by surprise monetary tightening relative to other firms. On the other hand, we find no differential effect in the United States. We stress the role of firm liquidity management and difference in financial systems to explain these findings.

• 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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