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The Drop in Non-Financial Firms' Cost of Credit: A Cross-Country Analysis

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  • Paolo Finaldi Russo
  • Fabio Parlapiano

Abstract

Following the sovereign debt crisis, bank interest rates charged to non-financial firms declined sharply in the euro area. This work explores the firms' balance-sheet channel hypothesis on the role played by firms' characteristics and risk profile in the transmission of monetary policy. Using a European firm-level survey, we find that in all countries changes in borrowers' characteristics play a non-negligible role. They account for 23 out of 289 basis points of the total interest rate drop in vulnerable economies, and 35 out of 160 basis points in core European countries. The improvement in financial situation is the key firm characteristic driving the decline in interest rates in vulnerable countries, whereas in core countries the decline is mainly due to a shift in bank credit towards relatively larger borrowers.

Suggested Citation

  • Paolo Finaldi Russo & Fabio Parlapiano, 2018. "The Drop in Non-Financial Firms' Cost of Credit: A Cross-Country Analysis," Politica economica, Società editrice il Mulino, issue 1, pages 23-44.
    • Handle: RePEc:mul:je8794:doi:10.1429/89708:y:2018:i:1:p:23-44
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    References listed on IDEAS

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    1. Ashcraft, Adam B. & Campello, Murillo, 2007. "Firm balance sheets and monetary policy transmission," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1515-1528, September.
    2. Berndt, Antje & Obreja, Iulian, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank.
    3. Aysun, Uluc & Hepp, Ralf, 2013. "Identifying the balance sheet and the lending channels of monetary transmission: A loan-level analysis," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2812-2822.
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    More about this item

    Keywords

    Interest Rates; SAFE; Financial Constraints; Credit Rationing.;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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