Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market

62 Pages Posted: 22 Oct 2013

See all articles by Filippo Ippolito

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston

Ander Perez-Orive

Federal Reserve Board

Multiple version iconThere are 3 versions of this paper

Date Written: October 2013

Abstract

We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.

Keywords: bank financial health, bank lending channel, firm financial constraints, floating interest rates, monetary policy transmission

JEL Classification: E52, G21, G32

Suggested Citation

Ippolito, Filippo and Ozdagli, Ali K. and Perez-Orive, Ander, Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market (October 2013). CEPR Discussion Paper No. DP9696. Available at SSRN: https://ssrn.com/abstract=2343706

Filippo Ippolito (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

HOME PAGE: http://sites.google.com/site/ozdagli/

Ander Perez-Orive

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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