Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

77 Pages Posted: 3 Mar 2020

Date Written: February 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: Credit channel, credit spreads, event study, Excess Bond Premium, financial accelerator, Heterogeneity, identification, monetary policy

JEL Classification: E44, F44, G15

Suggested Citation

Cesa-Bianchi, Ambrogio, Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity (February 2020). CEPR Discussion Paper No. DP14426, Available at SSRN:

Ambrogio Cesa-Bianchi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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