Debt Maturity Heterogeneity and Investment Responses to Monetary Policy

61 Pages Posted: 3 Oct 2018 Last revised: 5 Sep 2022

See all articles by Minjie Deng

Minjie Deng

Simon Fraser University, Department of Economics

Min Fang

University of Florida - Department of Economics

Date Written: September 3, 2020

Abstract

We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.

Keywords: monetary policy; firm heterogeneity; debt maturity; financial frictions;

JEL Classification: E44, E52, G31

Suggested Citation

Deng, Minjie and Fang, Min, Debt Maturity Heterogeneity and Investment Responses to Monetary Policy (September 3, 2020). European Economic Review, May 2022, Volume 144: 104095, Available at SSRN: https://ssrn.com/abstract=3246722 or http://dx.doi.org/10.2139/ssrn.3246722

Minjie Deng

Simon Fraser University, Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.minjiedeng.me/

Min Fang (Contact Author)

University of Florida - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32606
United States

HOME PAGE: http://www.minfang.info

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