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Heterogeneous responses to monetary policy: The role of floating rate loans

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  • Kerola, Eeva
  • Laine, Olli-Matti
  • Paavola, Aleksi

Abstract

This study examines the floating rate channel-a mechanism through which monetary policy affects firms' investment and credit demand based on their exposure to variable rate loans. Using a granular loan-level dataset from the euro area, we find that firms with variable rate loans significantly reduce their investment-related borrowing after monetary tightening, compared to firms with fixed rate loans. This effect is most pronounced among the smallest firms, consistent with the theoretical view that the floating rate channel is explained by financial constraints. Our results highlight the heterogeneity in firms' reactions to interest rate changes and underscore the importance of accounting for firm size and financial constraints in monetary policy analysis.

Suggested Citation

  • Kerola, Eeva & Laine, Olli-Matti & Paavola, Aleksi, 2025. "Heterogeneous responses to monetary policy: The role of floating rate loans," Bank of Finland Research Discussion Papers 7/2025, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:325483
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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