Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity
68 Pages Posted: 26 Jan 2021
Date Written: December 1, 2020
Credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a panel of corporate bonds matched with balance sheet data for U.S. 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. Our results suggest that frictions in the financial intermediation sector play a crucial role in shaping the transmission mechanism of monetary policy.
JEL Classification: E44, E50, G10, E52
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