DP14426 Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity
Author(s): | Ambrogio Cesa-Bianchi |
Publication Date: | February 2020 |
Keyword(s): | Credit channel, credit spreads, event study, Excess Bond Premium, financial accelerator, Heterogeneity, identification, monetary policy |
JEL(s): | E44, F44, G15 |
Programme Areas: | Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=14426 |
We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default -- the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.