Foreign Monetary Policy and Firms' Default Risk

The European Journal of Finance, Doi.org/10.1080/1351847X.2019.1710225

53 Pages Posted: 11 Mar 2016 Last revised: 13 Jan 2020

See all articles by Jonatan Groba

Jonatan Groba

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Pedro Serrano

University Carlos III of Madrid - Department of Business Administration

Date Written: January 03, 2020

Abstract

This study documents the relationship between foreign monetary policy and firms' ex-ante forward-looking default probability measures. We analyze market-based measures of default for large non-financial firms in the US and the EMU area. We propose two transmission mechanisms of foreign policy shocks: the foreign demand channel and the foreign debt channel. We show that foreign monetary policy influences firms' default probability largely through the foreign demand channel. We find that the foreign debt channel only played a role for European firms during the early 2000s due to the higher exposure to USD denominated obligations. These results highlight the need for macro-prudential authorities to pay more attention to the foreign demand channel in the struggle against large default events, as the results show that the foreign debt channel is less relevant.

Keywords: Foreign Monetary Policy, Default Risk, Foreign Demand, Foreign Debt

JEL Classification: E44, E52, F23

Suggested Citation

Groba, Jonatan and Serrano, Pedro, Foreign Monetary Policy and Firms' Default Risk (January 03, 2020). The European Journal of Finance, Doi.org/10.1080/1351847X.2019.1710225, Available at SSRN: https://ssrn.com/abstract=2744607 or http://dx.doi.org/10.2139/ssrn.2744607

Jonatan Groba (Contact Author)

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Kennesaw, GA 30144
United States

Pedro Serrano

University Carlos III of Madrid - Department of Business Administration ( email )

C/ Madrid, 126
Getafe, Madrid 28903
Spain
+34916248926 (Phone)

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