The Drop in Non-Financial Firms Cost of Credit: A Cross-Country Analysis
25 Pages Posted: 17 Apr 2018
Date Written: February 27, 2018
Following the sovereign debt crisis, bank interest rates charged to non-financial firms declined sharply in the euro area. This work explores the firms’ balance-sheet channel hypothesis on the role played by firms’ characteristics and risk profile in the transmission of monetary policy. Using a European firm-level survey, we find that in all countries changes in borrowers’ characteristics played a non-negligible role. They account for 30 out of 267 basis points of the total interest rate drop in Italy, 36 out of 160 basis points in core European countries and less than 20 out of 306 basis points in other vulnerable economies. The key firm characteristic driving the decline in interest rates in Italy and in other vulnerable countries is the improvement in the financial situation of non-financial firms, whereas in core countries the decline is mainly due to a shift in bank credit towards relatively older and larger borrowers.
Keywords: interest rates, SAFE, financial constraints, credit rationing
JEL Classification: G20, G30
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