Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to Smes and Large Firms
58 Pages Posted: 19 Apr 2021 Last revised: 17 Nov 2024
There are 2 versions of this paper
Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to Smes and Large Firms
Risk-Taking and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms
Date Written: April 2021
Abstract
We study the role of heterogeneous financial frictions in investment and credit channels of monetary policy, using firm-bank matched administrative data for the U.S. We find that collateral heterogeneity in loan contracts explains the relaxing/tightening of financial constraints in response to monetary shocks. Small and risky firms rely on their earnings and intangibles as collateral, which means their leverage is backed by procyclical earnings. Monetary expansions lower the marginal cost of funds for these firms and expand their borrowing capacity. Monetary policy can be highly effective in economies dominated by small firms pledging their earnings and intangibles as collateral, even though these firms have high default risk.
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