Download This PaperFinancial Constraints and the Transmission of Monetary Policy: Evidence from Relaxation of Collateral Constraints
78 Pages Posted: 15 Apr 2020 Last revised: 16 Mar 2025
Date Written: March 25, 2020
Abstract
How do financial constraints affect the transmission of monetary policy? I examine this question using the staggered enactment of anti-recharacterization legislation as a source of exogenous variation in creditor rights that loosens firm-financial constraints. A 25 basis-point expansionary monetary policy shock results in a 2 percentage-point higher investment growth among treated (unconstrained) firms. Using a Heterogeneous-Firm-New-Keynesian model, I estimate that the law relaxed firm collateral constraint by 16%. The model highlights the mechanism that the relaxation of collateral constraint flattens the firm marginal cost curve, which amplifies responses to shifts in the marginal benefit curve due to monetary policy shocks.
Keywords: Creditor Rights, Monetary Policy, Financial Frictions, Investment
JEL Classification: D22, K20, E22, E43, E52, G31
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