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Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

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  • Gareth Anderson

    (International Monetary Fund (IMF)
    University of Oxford)

  • Ambrogio Cesa-Bianchi

    (Bank of England
    Centre for Economic Policy Research (CEPR)
    Centre for Macroeconomics (CFM))

Abstract

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.

Suggested Citation

  • Gareth Anderson & Ambrogio Cesa-Bianchi, 2020. "Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity," Discussion Papers 2005, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2005
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    More about this item

    Keywords

    Monetary policy; Heterogeneity; Credit spreads; Excess bond premium; Credit channel; Financial accelerator; Event study; Identification;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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