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Granular shocks to corporate leverage and the macroeconomic transmission of monetary policy

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  • Holm-Hadulla, Fédéric
  • Thürwächter, Claire

Abstract

We study how shocks to corporate leverage alter the macroeconomic transmission of monetary policy. We identify leverage shocks as idiosyncratic firm-level disturbances that are aggregated up to a size-weighted country-level average to generate a Granular Instrumental Variable (Gabaix and Koijen, forthcoming). Interacting this instrumental variable with high-frequency identified monetary policy shocks, we find that transmission to the price level strengthens in the presence of leverage shocks, while the real effects of monetary policy are unaffected. We show that this disconnect can be rationalized with an internal devaluationchannel. Economies experiencing an increase in leverage exhibit a stronger monetary policy-induced contraction in domestic demand. This, however, is counteracted by a weaker contraction in exports, facilitated by their improved price competitiveness. JEL Classification: C36, E22, E52

Suggested Citation

  • Holm-Hadulla, Fédéric & Thürwächter, Claire, 2024. "Granular shocks to corporate leverage and the macroeconomic transmission of monetary policy," Working Paper Series 2891, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242891
    Note: 1624014
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    corporate leverage; granular instrumental variable; micro-to-macro analysis; monetary policy transmission;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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