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Credit Frictions, Debt Choice and the Transmission of Monetary Policy

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  • Wright, Julian

Abstract

This paper presents a model where shocks to interest rates, company earnings and the earnings of financial intermediaries all affect the investment of small but not large firms. These shocks also affect the extent of financial intermediation and companies' debt choice. Evidence from micro and macro data supports the model's predictions. I show that shocks which work by weakening the financial position of firms can explain a sizeable part of the growth slowdown in recessions. Conversely, I show that shocks which work by restricting the ability of financial intermediaries to lend are not significant. Consistent with this I find little evidence of a bank lending channel.

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Handle: RePEc:ags:canzdp:263780
DOI: 10.22004/ag.econ.263780
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