The Bond Lending Channel of Monetary Policy

64 Pages Posted: 15 Jul 2019

See all articles by Olivier Darmouni

Olivier Darmouni

Columbia University - Columbia Business School

Oliver Giesecke

Columbia University

Alexander Rodnyansky

University of Cambridge - Faculty of Economics

Date Written: July 13, 2019

Abstract

An increasing share of firms' borrowing occurs through bond markets. We present high-frequency evidence from the Eurozone that bond-reliant firms are more responsive to monetary shocks: in contrast to standard bank lending channel predictions, unexpected ECB policy changes affect their stock prices by more, even conditional on total debt and industry fixed-effects. We develop an organizing framework to decompose the stock price, credit risk and investment response of large firms. We emphasize the role of corporate liquidity management: firms react to rate hikes by being prudent in good times, reducing investment in favor of hoarding liquid assets. Since bond financing is less flexible in bad times than relationship banking, this effect can rationalize why the mix of bank and bond financing matters for monetary transmission. A mitigating force is that bonds generally have longer duration and lower interest-rate pass-through relative to loans. Our findings suggest that the recent global growth in bond debt following quantitative easing could interact with conventional interest rate policy going forward.

Keywords: Monetary policy, ECB, Debt Structure, Bank loans, Corporate bonds

JEL Classification: E44, E52, G21, G23

Suggested Citation

Darmouni, Olivier and Giesecke, Oliver and Rodnyansky, Alexander, The Bond Lending Channel of Monetary Policy (July 13, 2019). Available at SSRN: https://ssrn.com/abstract=3419235 or http://dx.doi.org/10.2139/ssrn.3419235

Olivier Darmouni (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Oliver Giesecke

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Alexander Rodnyansky

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.arodnyansky.com

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