Financial Heterogeneity and the Investment Channel of Monetary Policy

By Pablo Ottonello, T. Winberry. Econometrica, 2018

391 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/159506153b1b912c39b729795f31cadd1edc953e

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Citations in the corpus

Microeconomic Heterogeneity and Macroeconomic Shocks (2018, background): “…and Thomas (2008) for the debate on how firmlevel non-convex adjustment costs influence aggregate investment and Gertler and Gilchrist (1994) and Ottonello and Winberry (2018) for the debate on how firm-level financial constraints affect the transmission of monetary policy. apply to that…”
Monetary Policy, Corporate Finance and Investment (2018, neutral): “23This approach does not, therefore, require that the high frequency surprises are the true monetary policy shocks (as in Ottonello and Winberry (2018) and Jeenas (2018)).”