Corporate Effects of Monetary Policy: Evidence from Central Bank Liquidity Lines

Monetary policy tools increasingly involve operations with corporate assets. This paper examines how these tools directly impact real activity by influencing demand for firms' debt instruments and firms' liquidity management policies. Using quasi-experimental variation from the inclusion of eligible corporate debt instruments in the Central Bank of Brazil's collateral framework, combined with a novel dynamic regression discontinuity design methodology, we find that eligibility increased firms’ debt issuance, modestly decreased spreads, and reduced firms' holdings of safe assets, indicating a decrease in precautionary savings and leading to significant increases in firms' employment and supply chain liquidity. To interpret this mechanism, we discuss how inelastic (segmented) financial markets make this policy induce a permanent borrowing subsidy, functioning like a liquidity injection that can relax firms' borrowing constraints. This easing of expected future borrowing constraints reduces firms' liquidity risk, amplifying the policy passthrough as firms have more incentives to reduce cash hoarding and expand production. We develop a semi-structural approach based on our reduced-form RDD estimates to measure firms' response, finding that each 0.8% induced borrowing subsidy leads to 1% increase in debt issuance, 0.2% reduction in cash holdings and a 0.4% increase in the wage bill.