The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

48 Pages Posted: 14 Dec 2014 Last revised: 16 Dec 2015

See all articles by Nathan Foley-Fisher

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System

Rodney Ramcharan

University of Southern California, Marshall School of Business

Edison Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 5 versions of this paper

Date Written: December 2015

Abstract

This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market.

Keywords: monetary policy, asset prices, external finance

JEL Classification: E44, E52, G22, G32

Suggested Citation

Foley-Fisher, Nathan and Ramcharan, Rodney and Yu, Edison, The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program (December 2015). Available at SSRN: https://ssrn.com/abstract=2537958 or http://dx.doi.org/10.2139/ssrn.2537958

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Rodney Ramcharan (Contact Author)

University of Southern California, Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.google.com/site/rodneyramcharan/

Edison Yu

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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