Time: 1.00 - 2.00pm Venue: Room 3.21, Old Building, LSE (map)
Speaker: Ambrogio Cesa-Bianchi (Bank of England) - joint work with Gareth Anderson (IMF)
Seminar Title: Firm Heterogeneity, Credit Spreads, and Monetary Policy
Abstract: We construct a new highly disaggregated data set to investigate how firms’ borrowing costs respond to monetary policy using an event study approach. We measure monetary policy surprises as unexpected changes in interest rates over a 30-minute window around scheduled Federal Reserve announcements. As a measure of firms’ financing costs, we use a large panel of credit spreads constructed from individual corporate bond data for the US non-financial sector. We document that a surprise tightening in monetary policy leads to an overall increase in credit spreads. We then exploit the granularity of our data set to show that (i) the overall effect is driven by firms with high leverage and (ii) a large fraction of the overall effect is due to the response of the risk premium component of credit spreads. We interpret our results as supportive of a powerful credit channel of monetary policy. Consistent with our interpretation, we also show that monetary policy leads to a contraction in firms’ borrowing. As for credit spreads, we find that the effect is larger, the higher is the leverage of the borrower.