Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

75 Pages Posted: 8 Feb 2020

Date Written: February 7, 2020

Abstract

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

Anderson, Gareth and Cesa-Bianchi, Ambrogio, Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity (February 7, 2020). Bank of England Working Paper No. 854, February 2020, Available at SSRN: https://ssrn.com/abstract=3534073 or http://dx.doi.org/10.2139/ssrn.3534073

Gareth Anderson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ambrogio Cesa-Bianchi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/ambropo/

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