Is the credit channel alive? Firm-level evidence on the sensitivity of borrowing spreads to monetary policy

We calculate borrowing costs for over 8000 U.S. firms and investigate how monetary policy affects these costs. We find that after 2009, the decrease in the shadow federal funds rates (monetary easing) decreased the borrowing costs of firms with unstable earnings and dividend payments (i.e., firms with a low quality rating) that pay a high premium when borrowing. Conversely, the loose monetary policy stance after 2009 increased the borrowing costs of firms (of high and low quality) that usually pay a lower premium when borrowing. Before 2008, these relationships are reversed: while firms that can usually obtain cheap external funding benefit from a monetary easing, firms with more expensive funding are adversely affected by this policy. Our results uncover distortional effects of monetary policy. Loose monetary policy causes borrowing costs to converge (diverge) across firms after 2009 (before 2008).