IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/95141.html
   My bibliography  Save this paper

The Bond Lending Channel of Monetary Policy

Author

Listed:
  • Darmouni, Olivier
  • Geisecke, Oliver
  • Rodnyanky, Alexander

Abstract

An increasing share of firms' borrowing occurs through bond markets. We present high-frequency evidence from the Eurozone that bond-reliant firms are more responsive to monetary shocks: in contrast to standard bank lending channel predictions, unexpected ECB policy changes affect their stock prices by more, even conditional on total debt and industry fixed-effects. We develop an organizing framework to decompose the stock price, credit risk and investment response of large firms. We emphasize the role of corporate liquidity management: firms react to rate hikes by being prudent in good times, reducing investment in favor of hoarding liquid assets. Since bond financing is less flexible in bad times than relationship banking, this effect can rationalize why the mix of bank and bond financing matters for monetary transmission. A mitigating force is that bonds generally have longer duration and lower interest-rate pass-through relative to loans. Our findings suggest that the recent global growth in bond debt following quantitative easing could interact with conventional interest rate policy going forward.

Suggested Citation

  • Darmouni, Olivier & Geisecke, Oliver & Rodnyanky, Alexander, 2019. "The Bond Lending Channel of Monetary Policy," MPRA Paper 95141, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:95141
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/95141/1/MPRA_paper_95141.pdf
    File Function: original version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/96342/12/MPRA_paper_96342.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/98722/19/MPRA_paper_98722.pdf
    File Function: revised version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas, 2006. "Corporate Finance and the Monetary Transmission Mechanism," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 829-870.
    2. Corsetti, Giancarlo & Duarte, Joao B. & Mann, Samuel, 2018. "One money, many markets: a factor model approach to monetary policy in the Euro Area with high-frequency identification," LSE Research Online Documents on Economics 87182, London School of Economics and Political Science, LSE Library.
    3. Lloyd, Simon P., 2020. "Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure," Journal of Banking & Finance, Elsevier, vol. 119(C).
    4. Ippolito, Filippo & Ozdagli, Ali K. & Perez-Orive, Ander, 2018. "The transmission of monetary policy through bank lending: The floating rate channel," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 49-71.
    5. Altavilla, Carlo & Brugnolini, Luca & Gürkaynak, Refet S. & Motto, Roberto & Ragusa, Giuseppe, 2019. "Measuring euro area monetary policy," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 162-179.
    6. Paligorova, Teodora & Santos, João A.C., 2017. "Monetary policy and bank risk-taking: Evidence from the corporate loan market," Journal of Financial Intermediation, Elsevier, vol. 30(C), pages 35-49.
    7. Fiorella De Fiore & Pedro Teles & Oreste Tristani, 2011. "Monetary Policy and the Financing of Firms," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 112-142, October.
    8. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2017. "The Deposits Channel of Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1819-1876.
    9. Daniel Greenwald, 2019. "Firm Debt Covenants and the Macroeconomy: The Interest Coverage Channel," 2019 Meeting Papers 520, Society for Economic Dynamics.
    10. Kurt Graden Lunsford, 2018. "Understanding the Aspects of Federal Reserve Forward Guidance," Working Papers (Old Series) 1815, Federal Reserve Bank of Cleveland, revised 07 Nov 2018.
    11. Gurkaynak, Refet S. & Karasoy Can, Gokce & Lee, Sang Seok, 2019. "Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect," CEPR Discussion Papers 14017, C.E.P.R. Discussion Papers.
    12. Neil Mehrotra & Nicolas Crouzet, 2017. "Small and Large Firms over the Business Cycle," 2017 Meeting Papers 600, Society for Economic Dynamics.
    13. Chang, Roberto & Fernández, Andrés & Gulan, Adam, 2017. "Bond finance, bank credit, and aggregate fluctuations in an open economy," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 90-109.
    14. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    15. Bo Becker & Victoria Ivashina, 2015. "Reaching for Yield in the Bond Market," Journal of Finance, American Finance Association, vol. 70(5), pages 1863-1902, October.
    16. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    17. Nicolas Crouzet & Neil Mehrotra, 2017. "Small and Large Firms over the Business Cycle," Working Papers 741, Federal Reserve Bank of Minneapolis, revised 05 Sep 2017.
    18. David Elliott & Ralf R. Meisenzahl & José-Luis Peydró & B.C. Turner, 2019. "Nonbanks, banks, and monetary policy: U.S. loan-level evidence since the 1990s," Economics Working Papers 1679, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2020.
    19. Florian Heider & Farzad Saidi & Glenn Schepens, 2019. "Life below Zero: Bank Lending under Negative Policy Rates," Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3728-3761.
    20. Fiorella De Fiore & Harald Uhlig, 2011. "Bank Finance versus Bond Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1399-1421, October.
    21. Fiorella De Fiore & Harald Uhlig, 2015. "Corporate Debt Structure and the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1571-1598, December.
    22. Atif Mian & Amir Sufi & Emil Verner, 2017. "Household Debt and Business Cycles Worldwide," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1755-1817.
    23. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    24. Paul Asquith & Robert Gertner & David Scharfstein, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 625-658.
    25. Óscar Arce & Ricardo Gimeno & Sergio Mayordomo, 2018. "The effects of the Eurosystem’s corporate sector purchase programme on Spanish companies," Economic Bulletin, Banco de España;Economic Bulletin Homepage, issue MAR, pages 1-6.
    26. Marek Jarociński & Peter Karadi, 2020. "Deconstructing Monetary Policy Surprises—The Role of Information Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 1-43, April.
    27. Gabriel Jimenez & Steven Ongena & Jose-Luis Peydro & Jesus Saurina, 2012. "Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications," American Economic Review, American Economic Association, vol. 102(5), pages 2301-2326, August.
    28. Reinder Haitsma & Deren Unalmis & Jakob de Haan, 2016. "The Impact of the ECB�s Conventional and Unconventional Monetary Policies on Stock Markets," Working Papers 1605, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    29. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    30. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    31. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    32. Sam Langfield & Marco Pagano, 2016. "Bank bias in Europe: effects on systemic risk and growth," Economic Policy, CEPR;CES;MSH, vol. 31(85), pages 51-106.
    33. Giancarlo Corsetti & Joao B. Duarte & Samuel Mann, 2018. "One Money, Many Markets," Discussion Papers 1805, Centre for Macroeconomics (CFM).
    34. Dong Beom Choi & Thomas M. Eisenbach & Tanju Yorulmazer, 2015. "Watering a lemon tree: heterogeneous risk taking and monetary policy transmission," Staff Reports 724, Federal Reserve Bank of New York.
    35. Mian, Atif & Santos, João A.C., 2018. "Liquidity risk and maturity management over the credit cycle," Journal of Financial Economics, Elsevier, vol. 127(2), pages 264-284.
    36. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    37. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    38. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
    39. 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.
    40. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply," American Economic Review, American Economic Association, vol. 86(1), pages 310-314, March.
    41. Bo Becker & Jens Josephson, 2016. "Insolvency Resolution and the Missing High-Yield Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2814-2849.
    42. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    43. Javier Bianchi & Saki Bigio, 2014. "Banks, Liquidity Management and Monetary Policy," Working Papers 2014-18, Peruvian Economic Association.
    44. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    45. Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2019. "Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms," CEPR Discussion Papers 14050, C.E.P.R. Discussion Papers.
    46. Michael Schwert, 2020. "Does Borrowing from Banks Cost More than Borrowing from the Market?," Journal of Finance, American Finance Association, vol. 75(2), pages 905-947, April.
    47. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    48. Denis, David J. & Mihov, Vassil T., 2003. "The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings," Journal of Financial Economics, Elsevier, vol. 70(1), pages 3-28, October.
    49. James Cloyne & Clodomiro Ferreira & Maren Froemel & Paolo Surico, 2018. "Monetary Policy, Corporate Finance and Investment," NBER Working Papers 25366, National Bureau of Economic Research, Inc.
    50. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    51. Conor T. Howells & Bastian von Beschwitz, 2016. "Are Euro-Area Corporate Bond Markets Irrelevant? The Effect of Bond Market Access on Investment," International Finance Discussion Papers 1176, Board of Governors of the Federal Reserve System (U.S.).
    52. Pablo Ottonello & Thomas Winberry, 2018. "Financial Heterogeneity and the Investment Channel of Monetary Policy," NBER Working Papers 24221, National Bureau of Economic Research, Inc.
    53. Fiorella De Fiore & Harald Uhlig, 2011. "Bank Finance versus Bond Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1399-1421, October.
    54. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
    55. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
    56. Ali K Ozdagli, 2018. "Financial Frictions and the Stock Price Reaction to Monetary Policy," Review of Financial Studies, Society for Financial Studies, vol. 31(10), pages 3895-3936.
    57. Marco Di Maggio & Amir Kermani & Benjamin J. Keys & Tomasz Piskorski & Rodney Ramcharan & Amit Seru & Vincent Yao, 2017. "Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging," American Economic Review, American Economic Association, vol. 107(11), pages 3550-3588, November.
    58. Stépahne Lhuissier & Urszula Szczerbowicz, 2018. "Monetary Policy and Corporate Debt Structure," Working papers 697, Banque de France.
    59. Vickery, James, 2008. "How and why do small firms manage interest rate risk," Journal of Financial Economics, Elsevier, vol. 87(2), pages 446-470, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Holm-Hadulla, Fédéric & Thürwächter, Claire, 2020. "Heterogeneity in corporate debt structures and the transmission of monetary policy," Working Paper Series 2402, European Central Bank.

    More about this item

    Keywords

    Monetary policy; ECB; Debt Structure; Bank loans; Corporate bonds;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:95141. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.