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Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market

  • Ander Perez

    (Universitat Pompeu Fabra)

  • Ali Ozdagli

    (Federal Reserve Bank of Boston)

  • Filippo Ippolito

    (Universitat Pompeu Fabra)

Registered author(s):

    This paper studies the importance of bank lending to firms for the transmission of monetary policy to the real economy. We employ a novel dataset that enables us to measure bank-dependence of firms accurately, and show that the stock prices of bank-dependent firms are significantly more responsive to monetary policy shocks, controlling for firm leverage and financial constraints. We explore the channels through which this effect occurs, and find that bank dependent firms that borrow from financially distressed banks display a much stronger sensitivity to monetary policy shocks. This finding is consistent with an active bank lending channel, according to which the strength of a bank's balance sheets matters for monetary policy transmission. We also show that bank dependent firms that hedge against interest rate risk display a much lower sensitivity to monetary policy shocks, consistent with an interest rate channel that operates via the pass-through of interest rates, associated with the widespread use of floating-rates in bank loans and credit line agreements. Taken together, these results suggest that bank lending to firms plays an important role in the transmission of monetary policy, but that there is significant heterogeneity across bank dependent firms in their reaction to monetary policy shocks.

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    File URL: https://www.economicdynamics.org/meetpapers/2013/paper_1219.pdf
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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1219.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:1219
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    1. Jeremy C. Stein, 1995. "An Adverse Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," NBER Working Papers 5217, National Bureau of Economic Research, Inc.
    2. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
    3. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
    4. Adam B. Ashcraft, 2001. "New evidence on the lending channel," Staff Reports 136, Federal Reserve Bank of New York.
    5. Refet Gürkaynak & Brian Sack, 2005. "Do Actions Speak Louder Than Words?The Response of Asset Prices to Monetary Policy Actions and Statements," Computing in Economics and Finance 2005 323, Society for Computational Economics.
    6. Den Haan, Wouter & Sumner, Steven & Yamashiro, Guy, 2004. "Banks' Loan Portfolio and the Monetary Transmission Mechanism," CEPR Discussion Papers 4725, C.E.P.R. Discussion Papers.
    7. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," NBER Working Papers 10402, National Bureau of Economic Research, Inc.
    8. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series 2006-23, Federal Reserve Bank of San Francisco.
    9. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
    10. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
    11. Ongena, Steven & Smith, David C. & Michalsen, Dag, 2003. "Firms and their distressed banks: lessons from the Norwegian banking crisis," Journal of Financial Economics, Elsevier, vol. 67(1), pages 81-112, January.
    12. 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.
    13. Daniel Paravisini, 2008. "Local Bank Financial Constraints and Firm Access to External Finance," Journal of Finance, American Finance Association, vol. 63(5), pages 2161-2193, October.
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