Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity
75 Pages Posted: 8 Feb 2020
Date Written: February 7, 2020
We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms’ expected default — the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.
Keywords: monetary policy, heterogeneity, credit spreads, excess bond premium, credit channel, financial accelerator, event-study, identification
JEL Classification: E44, F44, G15
Suggested Citation: Suggested Citation