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The transmission of monetary policy through bank lending: The floating rate channel

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  • Ippolito, Filippo
  • Ozdagli, Ali K.
  • Perez-Orive, Ander

Abstract

Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy can directly affect the liquidity and balance sheet strength of firms through existing loans. We show that firms—especially financially constrained firms—with more unhedged loans display a stronger sensitivity of their stock price, cash holdings, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, revealing a new limitation of unconventional monetary policy. The floating-rate channel is at least as important as the bank lending channel operating through new loans.

Suggested Citation

  • Ippolito, Filippo & Ozdagli, Ali K. & Perez-Orive, Ander, 2018. "The transmission of monetary policy through bank lending: The floating rate channel," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 49-71.
  • Handle: RePEc:eee:moneco:v:95:y:2018:i:c:p:49-71
    DOI: 10.1016/j.jmoneco.2018.02.001
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    More about this item

    Keywords

    Monetary policy transmission; Bank debt; Floating interest rates; Financial constraints; Hedging;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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