Forward Guidance and Corporate Lending
Review of Finance, Vol. 26, No. 4, pp.899-935, July 2022
70 Pages Posted: 9 Feb 2020 Last revised: 3 Nov 2022
Date Written: September 1, 2021
We suggest that forward guidance, via publicly committing the central bank to future actions and creating associated expectations, fundamentally affects bank lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Forward guidance also affects nonprice lending terms, such as covenants, performance pricing provisions, and the loan syndicate structure. Additionally, banks tend to initiate new lending relationships with lower spreads after forward guidance issuance.
Keywords: Forward guidance; Monetary policy transmission; Bank lending; Corporate loans; Loan spreads; Syndicate structure; Bank-firm relationships
JEL Classification: G21; E52; E43; E58
Suggested Citation: Suggested Citation