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Corporate Leverage and Monetary Policy Effectiveness in the Euro Area

Author

Listed:
  • Simone Auer

    (Bank of Italy)

  • Marco Bernardini

    (Bank of Italy)

  • Martina Cecioni

    (Bank of Italy)

Abstract

We study the relationship between corporate leverage and the sensitivity of industrial production to monetary policy shocks within the euro-area manufacturing sector. Using polynomial state-dependent local projections, we document a non-linear association. When leverage is low, more indebted industries adjust their production more strongly in response to a monetary policy shock, consistently with a financial accelerator framework. At higher leverage ratios, this positive relationship weakens until it reaches a point where additional leverage is associated with a decrease in sensitivity to monetary policy. We show that this weakening effect is particularly intense within the short-term horizon and in recessions. Our results are consistent with recent studies analyzing the role of default risk in dampening the financial accelerator mechanism.

Suggested Citation

  • Simone Auer & Marco Bernardini & Martina Cecioni, 2019. "Corporate Leverage and Monetary Policy Effectiveness in the Euro Area," Temi di discussione (Economic working papers) 1258, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1258_19
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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