A Capital Structure Channel of Monetary Policy

67 Pages Posted: 19 Jun 2017 Last revised: 24 Sep 2018

See all articles by Benjamin Grosse-Rueschkamp

Benjamin Grosse-Rueschkamp

ESMT European School of Management and Technology

Sascha Steffen

Frankfurt School of Finance & Management

Daniel Streitz

Copenhagen Business School

Date Written: September 18, 2018

Abstract

We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low Tier-1 ratios and high non-performing loans increase lending to private (and profitable) firms, which experience a growth in capital expenditures and sales. The credit reallocation increases banks’ risk-taking in corporate credit.

Keywords: debt capital structure, bond debt, unconventional monetary policy, CSPP, real effects

JEL Classification: G01, G21, G28

Suggested Citation

Grosse-Rueschkamp, Benjamin and Steffen, Sascha and Streitz, Daniel, A Capital Structure Channel of Monetary Policy (September 18, 2018). Available at SSRN: https://ssrn.com/abstract=2988158 or http://dx.doi.org/10.2139/ssrn.2988158

Benjamin Grosse-Rueschkamp

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstr. 9 -11
Frankfurt, 60314
Germany

HOME PAGE: http://www.sascha-steffen.de

Daniel Streitz

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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