Working Paper: NBER ID: w24221
Authors: Pablo Ottonello; Thomas Winberry
Abstract: We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk – those with low debt burdens and high “distance to default” – are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low-risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.
Keywords: financial frictions; firm heterogeneity; monetary policy; investment channel
JEL Codes: D22; D25; E22; E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high overall default risk (G33) | dampened effectiveness of monetary policy (E52) |
| low default risk (G33) | increased responsiveness to monetary policy shocks (E39) |
| low leverage (G19) | increased responsiveness to monetary policy shocks (E39) |
| high distance to default (G33) | increased responsiveness to monetary policy shocks (E39) |