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The Bond Lending Channel of Monetary Policy

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  • 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.

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  • 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
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    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.

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    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

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