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The impact of macroeconomic and monetary policy shocks on credit risk in the euro area corporate sector

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  • Lo Duca, Marco
  • Moccero, Diego
  • Parlapiano, Fabio

Abstract

We analyse the impact of macroeconomic and monetary policy shocks on corporate credit risk as measured by firms’ probabilities of default (PDs) for the four largest euro area countries. We estimate the impact of shocks on one-year PDs using local projections (LP). For the period 2014-19, we find that aggregate shocks significantly affect the dynamics of credit risk. An adverse supply shock leads to a deterioration of firms’ riskiness 10 per cent above the average PD. Contractionary monetary policy shocks exert similar, but delayed effects. Firms’ responses to shocks vary depending on their characteristics and degree of financial constraints. Smaller firms are affected to a larger degree. Firms’ outstanding indebtedness and debt repayment capacity are an important transmission channel for aggregate shocks, but the accumulation of cash reserves helps building resilience. JEL Classification: C23, C55, E43, E52, G33

Suggested Citation

  • Lo Duca, Marco & Moccero, Diego & Parlapiano, Fabio, 2024. "The impact of macroeconomic and monetary policy shocks on credit risk in the euro area corporate sector," Working Paper Series 2897, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242897
    Note: 452517
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    More about this item

    Keywords

    corporate credit risk; local projections; monetary policy shocks; probabilities of default; structural demand and supply shocks;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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