Risk-Taking and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms

Abstract

Using administrative firm-bank-loan level data, we document new facts about the U.S. credit market and monetary policy transmission. Private firms that are mostly small-medium-size-enterprises (SMEs) borrow from banks and use their enterprise's continuation value as collateral. Relative to large publicly listed firms, monetary expansions increase highly levered SMEs' demand for credit and their borrowing capacity because their continuation values rise and their ability to repay debt improves. Our results imply that the effctiveness of monetary policy depends on both the firm-size distribution and the type of collateral pledged.

JEL Classification: E32, E44, E52, G20, O16