Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity‐Based Identification in a Model with Regimes

45 Pages Posted: 24 Sep 2019

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University - Department of Finance

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Valentina Massagli

Bocconi University - Baffi Carefin Centre

Date Written: September 2019

Abstract

We investigate the effects of a conventional monetary expansion, the quantitative easing, and maturity extension programs on the yields of corporate bonds. We adopt a multiple-regime VAR identification based on heteroskedasticity. An impulse response function analysis shows that a traditional, rate based expansionary policy leads to an increase in yields. The response to quantitative easing is instead a general and persistent decrease, in particular for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost private debt primarily through a reduction in risk premia.

Keywords: unconventional monetary policy; transmission channels; heteroskedasticity; vector autoregressions; identification; corporate bond yields

JEL Classification: G12, C32, G14

Suggested Citation

Guidolin, Massimo and Pedio, Manuela and Massagli, Valentina, Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity‐Based Identification in a Model with Regimes (September 2019). BAFFI CAREFIN Centre Research Paper No. 2019-118, Available at SSRN: https://ssrn.com/abstract=3458310 or http://dx.doi.org/10.2139/ssrn.3458310

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance ( email )

Via Sarfatti, 25
Milan, 20136
Italy

Valentina Massagli

Bocconi University - Baffi Carefin Centre ( email )

Via Roentgen 1
Milan
Italy

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