The Transmission of Monetary Policy Through Bank Lending: The Floating Rate Channel

105 Pages Posted: 26 Mar 2017

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: 2017-03

Abstract

We describe and test a mechanism through which outstanding bank loans affect the firm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to floating rates affect the liquidity, balance sheet strength, and investment of financially constrained firms that use bank debt. We show that firms---especially financially constrained firms---with more unhedged bank debt display stronger sensitivity of their stock price, cash holdings, sales, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, which further supports the floating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the floating rate channel can have a significant macroeconomic effect due to the large size of the aggregate stock of unhedged floating-rate business debt, an effect at least as important as the bank lending channel through new loans.

Keywords: Bank debt, Financial constraints, Firm balance sheet channel, Floating interest rates, Hedging, Monetary policy transmission

JEL Classification: G21, G32, E52

Suggested Citation

Ippolito, Filippo and Ozdagli, Ali K. and Perez-Orive, Ander, The Transmission of Monetary Policy Through Bank Lending: The Floating Rate Channel (2017-03). FEDS Working Paper No. 2017-026. Available at SSRN: https://ssrn.com/abstract=2940134 or http://dx.doi.org/10.17016/FEDS.2017.026

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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