Firm financial conditions and the transmission of monetary policy

Financial Frictions Shape Monetary Policy Transmission

The paper re-examines how financial frictions influence the transmission of monetary policy, utilizing firms' excess bond premia (EBPs), a measure of credit spread risk premium. Research findings show that while monetary policy easing shocks compress credit spreads more for higher-EBP (riskier) firms, lower-EBP firms' investment responds more significantly. Moreover, credit supply shocks mimic the heterogeneous effects of monetary policy, whereas credit demand shocks elicit homogeneous firm responses. A financial friction model with varying marginal benefit curves rationalizes these findings, contrasting previously examined channels that are inconsistent with the empirical evidence presented.