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How does the fed affect corporate credit costs? Default risk, creditor segmentation and the post-FOMC drift

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  • Walz, Stefan

Abstract

Surprise changes in monetary policy rates have a causal impact on credit risk measures, which display a significant post-FOMC drift. I employ a tight identification strategy to decompose the influence of firm-specific and creditor-specific factors across horizons. Firms with narrower income gaps and lower Tobin’s Q ratios exhibit heightened sensitivity at both short and long horizons. Bonds predominantly held by bond funds demonstrate only temporarily more sensitivity, indicating that credit market segmentation fails to account for the observed drift. Aggregate broker dealer capital scarcity is linked to an amplified response in the drift component. A large portion of the drift remains unexplained, revealing the limitations of cross-sectional characteristics in explaining the transmission mechanism.

Suggested Citation

  • Walz, Stefan, 2024. "How does the fed affect corporate credit costs? Default risk, creditor segmentation and the post-FOMC drift," Journal of Monetary Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:moneco:v:143:y:2024:i:c:s0304393223001241
    DOI: 10.1016/j.jmoneco.2023.10.008
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    More about this item

    Keywords

    Monetary policy; Bond markets; Financial intermediation;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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