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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)

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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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
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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