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Firm financial conditions and the transmission of monetary policy

Author

Listed:
  • R T Ferreira, Thiago

    (Federal Reserve Board)

  • A Ostry, Daniel

    (Bank of England)

  • Rogers, John

    (Fudan University)

Abstract

We re-examine how financial frictions shape the transmission of monetary policy using firms’ excess bond premia (EBPs), the risk premium component of credit spreads. While monetary policy easing shocks compress credit spreads more for higher-EBP (riskier) firms, lower-EBP firms’ investment responds more. Further, credit supply shocks replicate monetary policy’s heterogeneous effects, whereas credit demand shocks elicit homogeneous firm responses. A model with financial frictions in which lower-EBP firms have flatter marginal benefit curves for capital rationalises firms’ price and quantity reactions to these three shocks. In contrast, previously examined channels, while complementary, are inconsistent with our more comprehensive set of empirical moments.

Suggested Citation

  • R T Ferreira, Thiago & A Ostry, Daniel & Rogers, John, 2024. "Firm financial conditions and the transmission of monetary policy," Bank of England working papers 1093, Bank of England.
    • Handle: RePEc:boe:boeewp:1093
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2024/firm-financial-conditions-and-the-transmission-of-monetary-policy.pdf
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    More about this item

    Keywords

    Monetary policy; investment; credit spreads; excess bond premium; firm heterogeneity; credit supply; risk premium.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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