Working Paper: NBER ID: w28685
Authors: Cecilia R. Caglio; R. Matthew Darst; Ebnem Kalemlizcan
Abstract: We study the role of heterogeneous financial frictions in investment and credit channels of monetary policy, using firm-bank matched administrative data for the U.S. We find that collateral heterogeneity in loan contracts explains the relaxing/tightening of financial constraints in response to monetary shocks. Small and risky firms rely on their earnings and intangibles as collateral, which means their leverage is backed by procyclical earnings. Monetary expansions lower the marginal cost of funds for these firms and expand their borrowing capacity. Monetary policy can be highly effective in economies dominated by small firms pledging their earnings and intangibles as collateral, even though these firms have high default risk.
Keywords: monetary policy; SMEs; collateral heterogeneity; credit demand
JEL Codes: E32; E44; E52; G20; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy expansions (E59) | Credit demand of highly leveraged SMEs (G21) |
| Leverage of SMEs (L25) | Responsiveness to monetary policy expansions (E63) |
| Type of collateral (G32) | Responses of firms to monetary policy shocks (E39) |
| Monetary policy shocks (E39) | Cost of credit (G21) |
| Monetary policy shocks (E39) | Ability of firms to generate assets used as collateral (G32) |