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Corporate debt structure and monetary policy transmission: a general equilibrium approach

Author

Listed:
  • Cristina Badarau

    (University of Bordeaux)

  • Eleonora Cavallaro

    (Sapienza University of Rome)

  • Stefania Stancu

    (University of Bordeaux,)

Abstract

We analyse how corporate debt structure can shape the transmission of monetary policy in a general equilibrium model. We endogenise firms’ choice between bond and loan financing in a dynamic setting, building on the analytical framework of the financial accelerator and show that the corporate structure of firms is not irrelevant. We assume that banks have an informational advantage over other market participants in evaluating firms’ projects. This results in a lower cost of bank finance compared to market finance in a steady state, given institutional factors and market size. Over time, shocks to the cost of finance or liquidity shocks feed back into the dynamics of firms’ net worth, investment and output. In our framework, monetary policy can have asymmetric effects. On one hand, higher banks’ refinancing costs due to more stringent conventional monetary policies have a greater impact on firms that cannot easily substitute loans for bonds. Firms with easier access to the bond market have a competitive advantage over firms that can only rely on bank financing. On the other hand, shocks that increase the liquidity in the bond markets, such as unconventional monetary policies, benefit firms with a more diversified corporate debt structure. From this perspective, the development of bond markets can have important macroeconomic implications for building resilience.

Suggested Citation

  • Cristina Badarau & Eleonora Cavallaro & Stefania Stancu, 2025. "Corporate debt structure and monetary policy transmission: a general equilibrium approach," Working Papers 2025.21, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2025.21
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    References listed on IDEAS

    as
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    2. Marie Alder & Nuno Coimbra & Urszula Szczerbowicz, 2025. "Corporate debt structure and heterogeneous monetary policy transmission," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Leveraging corporates' financial statements for policy insights, volume 65, Bank for International Settlements.
    3. Grégory LEVIEUGE & Cristina BADARAU-SEMENESCU, 2010. "Which policy-mix to mitigate the effects of the financial heterogeneity in a monetary union?," EcoMod2010 259600105, EcoMod.
    4. Christina Badarau & Grégory Levieuge, 2011. "Assessing the Effects of Financial Heterogeneity in a Monetary Union : A DSGE Approach," Larefi Working Papers 201108, Larefi, Université Bordeaux 4.
    5. Badarau, Cristina & Levieuge, Grégory, 2011. "Assessing the effects of financial heterogeneity in a monetary union a DSGE approach," Economic Modelling, Elsevier, vol. 28(6), pages 2451-2461.
    6. Christina Badarau & Grégory Levieuge, 2011. "Which policy-mix to mitigate the effects of financial heterogeneity in a monetary union?," Larefi Working Papers 201109, Larefi, Université Bordeaux 4.
    7. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
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    • E - Macroeconomics and Monetary Economics

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