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UPDATED PAPER ALERT Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity
Draft available at: https://bit.ly/2SQkBc4
Comments welcome!
Here's what it's about:
[THREAD]
[2/n] We document that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Firms with *high leverage* experience a more pronounced *increase* in credit spreads than firms with low leverage.
[3/n] What does this tell us about the transmission mechanism of monetary policy? Consider two heterogeneous firms in the {๐๐ข๐ฑ๐ช๐ต๐ข๐ญ,๐๐น๐ต๐ฆ๐ณ๐ฏ๐ข๐ญ ๐ง๐ช๐ฏ๐ข๐ฏ๐ค๐ฆ ๐ฑ๐ณ๐ฆ๐ฎ๐ช๐ถ๐ฎ} space. Firm j has lower net worth, higher leverage and faces higher credit spreads than Firm i
![[3/n] What does this tell us about the transmission mechanism of monetary policy? Consider two heterogeneous firms in the {๐๐ข๐ฑ๐ช๐ต๐ข๐ญ,๐๐น๐ต๐ฆ๐ณ๐ฏ๐ข๐ญ ๐ง๐ช๐ฏ๐ข๐ฏ๐ค๐ฆ ๐ฑ๐ณ๐ฆ๐ฎ๐ช๐ถ๐ฎ} space. Firm j has lower net worth, higher leverage and faces higher credit spreads than Firm i](https://pbs.twimg.com/media/EkPf_nHXgAIdvAH.jpg "[3/n] What does this tell us about the transmission mechanism of monetary policy? Consider two heterogeneous firms in the {๐๐ข๐ฑ๐ช๐ต๐ข๐ญ,๐๐น๐ต๐ฆ๐ณ๐ฏ๐ข๐ญ ๐ง๐ช๐ฏ๐ข๐ฏ๐ค๐ฆ ๐ฑ๐ณ๐ฆ๐ฎ๐ช๐ถ๐ฎ} space. Firm j has lower net worth, higher leverage and faces higher credit spreads than Firm i")
[4/n] A monetary policy tightening that reduces the demand for capital leads to a fall in credit spreads, which is larger for high-leverage firms -> Absent any other channel, the relative response of high-leverage firms would be *negative*, in contrast with our results
![[4/n] A monetary policy tightening that reduces the demand for capital leads to a fall in credit spreads, which is larger for high-leverage firms -> Absent any other channel, the relative response of high-leverage firms would be *negative*, in contrast with our results](https://pbs.twimg.com/media/EkPgRteXgAAnjeq.jpg "[4/n] A monetary policy tightening that reduces the demand for capital leads to a fall in credit spreads, which is larger for high-leverage firms -> Absent any other channel, the relative response of high-leverage firms would be *negative*, in contrast with our results")
[5/n] For our results to hold, monetary policy has to lead to a shift in the capital supply curves. This shift has to be large enough to generate an increase in credit spreads for both firms, with high-leverage firms experiencing a larger increase than low-leverage firms
![[5/n] For our results to hold, monetary policy has to lead to a shift in the capital supply curves. This shift has to be large enough to generate an increase in credit spreads for both firms, with high-leverage firms experiencing a larger increase than low-leverage firms](https://pbs.twimg.com/media/EkPgaPyWAAEgmoe.jpg "[5/n] For our results to hold, monetary policy has to lead to a shift in the capital supply curves. This shift has to be large enough to generate an increase in credit spreads for both firms, with high-leverage firms experiencing a larger increase than low-leverage firms")
[6/n] We develop a model combining frictions on firms (ร la Bernanke-Gertler-Gilchrist) and financial intermediaries (ร la Gertler-Karadi-Kiyotaki). In the model, a shift in the capital supply curve can equally stem from a tightening in firms' or intermediaries' constraints
[7/n] How to separate the two mechanisms? This is a challenge for any study that focuses on firm-level outcomes! Contrary to firm-level quantities, however, focusing on credit spreads enables some progress in this direction.
[8/n] We decompose credit spreads into a default risk component and a residual risk premium component. The component of spreads that is not associated with firms' default risk can be informative about the transmission via financial intermediaries https://bit.ly/3jTW7dF
[n/n] Our results show that high-leverage firms are more responsive to monetary policy even when keeping their `default risk' constant, suggesting that frictions in the financial intermediation sector can play a crucial role in shaping the transmission of monetary policy
We've been inspired by the great work of Ottonello-Winberry ( https://bit.ly/3jVnd45 ), Bahaj-Foulis-Pinter-Surico, @jcloyne- @ClodinFF-Fromel-Surico, @prtjns, Crouzet- @Realprofneil, @peterkaradi, and many others!
