A Capital Structure Channel of Monetary Policy
67 Pages Posted: 19 Jun 2017 Last revised: 11 Dec 2018
Date Written: September 18, 2018
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
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