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Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity-Based Identification in a Model with Regimes

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  • Massimo Guidolin
  • Manuela Pedio

Abstract

We investigate the effects of a conventional monetary expansion, the quantitative easing, and maturity extension programs on the yields of corporate bonds. We adopt a multiple-regime VAR identification based on heteroskedasticity. An impulse response function analysis shows that a traditional, rate based expansionary policy leads to an increase in yields. The response to quantitative easing is instead a general and persistent decrease, in particular for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost private debt primarily through a reduction in risk premia.

Suggested Citation

  • Massimo Guidolin & Manuela Pedio, 2019. "Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity-Based Identification in a Model with Regimes," BAFFI CAREFIN Working Papers 19118, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
  • Handle: RePEc:baf:cbafwp:cbafwp19118
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    More about this item

    Keywords

    unconventional monetary policy; transmission channels; heteroskedasticity; vector autoregressions; identification; corporate bond yields.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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