The Bond Lending Channel of Monetary Policy

Abstract

Corporate bond markets are a growing source of funding for companies throughout the world. How does a firm's debt composition affect the transmission of monetary policy? When frictions in bond financing are large, a bond lending channel can potentially dominate the conventional bank lending channel. We present high-frequency evidence consistent with this mechanism in the euro area: firms with more bonds are more affected by surprise monetary actions than their counterparts. This finding stands in contrast to the bank lending channel, suggesting that the role of bond financing in monetary transmission is more complex than previously thought.

Keywords: Monetary policy, corporate bonds, corporate finance, bank lending channel, high-frequency identification

JEL Classification: E44, E52, G21, G23