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Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms

Author

Listed:
  • Cecilia R. Caglio
  • R. Matthew Darst
  • Ṣebnem Kalemli-Özcan

Abstract

We study the role of heterogeneous financial frictions in investment and credit channels of monetary policy, using firm-bank matched administrative data for the U.S. We find that collateral heterogeneity in loan contracts explains the relaxing/tightening of financial constraints in response to monetary shocks. Small and risky firms rely on their earnings and intangibles as collateral, which means their leverage is backed by procyclical earnings. Monetary expansions lower the marginal cost of funds for these firms and expand their borrowing capacity. Monetary policy can be highly effective in economies dominated by small firms pledging their earnings and intangibles as collateral, even though these firms have high default risk.

Suggested Citation

  • Cecilia R. Caglio & R. Matthew Darst & Ṣebnem Kalemli-Özcan, 2021. "Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms," NBER Working Papers 28685, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28685
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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