Staff Working Paper No. 1,093
By Thiago R T Ferreira, Daniel A Ostry and John Rogers
We re-examine how financial frictions shape the transmission of monetary policy using firms’ excess bond premia (EBPs), the risk premium component of credit spreads. While monetary policy easing shocks compress credit spreads more for higher-EBP (riskier) firms, lower-EBP firms’ investment responds more. Further, credit supply shocks replicate monetary policy’s heterogeneous effects, whereas credit demand shocks elicit homogeneous firm responses. A model with financial frictions in which lower-EBP firms have flatter marginal benefit curves for capital rationalises firms’ price and quantity reactions to these three shocks. In contrast, previously examined channels, while complementary, are inconsistent with our more comprehensive set of empirical moments.
Firm financial conditions and the transmission of monetary policy
