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Corporate leverage and the effects of monetary policy on investment: a reconciliation of micro and macro elasticities

Author

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  • Dr. Gabriel Züllig
  • Valentin Grob

Abstract

We investigate how the level of corporate leverage affects firms' investment response to monetary policy shocks. Based on novel aggregate time series estimates, leverage acts amplifying, whereas in the cross section of firms, higher leverage predicts a muted response to monetary policy. We use a heterogeneous firm model to show that in general equilibrium, both empirical findings can be true at the same time: When the average firm has lower leverage and therefore reduces its investment demand more strongly after a contractionary shock, the price of capital declines sharply, which incentivizes all firms regardless of their leverage to invest relatively more, muting the aggregate decline of investment. We provide empirical evidence supporting this hypothesis. Overall, if there are general equilibrium adjustments to shocks, effects estimated by exploiting cross-sectional heterogeneity in micro data can differ substantially from the macroeconomic elasticities, in our example even in terms of their sign.

Suggested Citation

  • Dr. Gabriel Züllig & Valentin Grob, 2024. "Corporate leverage and the effects of monetary policy on investment: a reconciliation of micro and macro elasticities," Working Papers 2024-08, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2024-08
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2024/working_paper_2024_08
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    More about this item

    Keywords

    Firm heterogeneity; State dependence; Financial frictions; General equilibrium;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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