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Crossing the credit channel: credit spreads and firm heterogeneity

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  • Anderson, Gareth

    (Bank of England)

  • Cesa-Bianchi, Ambrogio

    (Bank of England, CFM and CEPR)

Abstract

We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms’ expected default — the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.

Suggested Citation

  • Anderson, Gareth & Cesa-Bianchi, Ambrogio, 2020. "Crossing the credit channel: credit spreads and firm heterogeneity," Bank of England working papers 854, Bank of England.
    • Handle: RePEc:boe:boeewp:0854
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    6. Anna Burova & Alexey Ponomarenko & Svetlana Popova & Andrey Sinyakov & Yulia Ushakova, 2022. "Measuring Heterogeneity in Banks’ Interest Rate Setting in Russia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(14), pages 4103-4119, November.
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    11. Darmouni, Olivier & Geisecke, Oliver & Rodnyanky, Alexander, 2019. "The Bond Lending Channel of Monetary Policy," MPRA Paper 95141, University Library of Munich, Germany.
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    15. Jarociński, Marek, 2022. "Central bank information effects and transatlantic spillovers," Journal of International Economics, Elsevier, vol. 139(C).
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    18. Patozi, A., 2023. "Green Transmission: Monetary Policy in the Age of ESG," Janeway Institute Working Papers 2302, Faculty of Economics, University of Cambridge.
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    22. Michael Smolyansky & Gustavo A. Suarez, 2021. "Monetary policy and the corporate bond market: How important is the Fed information effect?," Finance and Economics Discussion Series 2021-010, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    Monetary policy; heterogeneity; credit spreads; excess bond premium; credit channel; financial accelerator; event-study; identification;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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