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The Real Effects of Debt Covenants: Evidence from Australia

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  • Kim Nguyen

    (Reserve Bank of Australia)

Abstract

I study how the use and structure of debt covenants affect real business activity and pass-through of monetary policy using a newly constructed dataset of corporate debt covenants in Australia. I find that exposure to debt covenants disciplines firms' investment and staff expenses even in the absence of covenant breaches. In addition, covenants with interest coverage limits appear to amplify the transmission of monetary policy shocks while other types of covenants appear to mitigate transmission. As such, the shift from interest coverage limits to other types of covenants that appears to have occurred since the late 2000s may have lowered the responsiveness of investment to monetary policy, and in turn accounted for some of the surprising weakness in non-mining investment over the past decade.

Suggested Citation

  • Kim Nguyen, 2022. "The Real Effects of Debt Covenants: Evidence from Australia," RBA Research Discussion Papers rdp2022-05, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2022-05
    DOI: 10.47688/rdp2022-05
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    References listed on IDEAS

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    Cited by:

    1. Kim Nguyen & Jonathan Hambur, 2023. "Adoption of Emerging Digital General-purpose Technologies: Determinants and Effects," RBA Research Discussion Papers rdp2023-10, Reserve Bank of Australia.

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    More about this item

    Keywords

    debt covenants; financing friction; investment; employment; monetary policy;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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