The transmission of monetary policy through bank lending: The floating rate channel

Abstract

We examine both theoretically and empirically a mechanism through which outstanding bank loans a¤ect the …rm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have ‡oating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to ‡oating rates a¤ect the liquidity, balance sheet strength, and investment of …nancially constrained …rms that use bank debt. We show that …rms-especially …nancially constrained …rms-with more unhedged bank debt display a stronger sensitivity of their stock price, cash holdings, sales, inventory, and …xed capital investment to monetary policy. This e¤ect disappears when policy rates are at the zero lower bound, which further supports the ‡oating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the ‡oating rate channel can have a signi…cant macroeconomic e¤ect due to the large size of the aggregate stock of unhedged ‡oating-rate business debt, an e¤ect that is at least as important as the bank lending channel that operates through new loans.

Monetary Policy through Production Networks: Evidence from the Stock Market

“…Besides the effect on the level of the stock market, researchers have recently also studied cross-sectional differences in the response to monetary policy. Ehrmann and Fratzscher (2004) and Ippolito, Ozdagli, and Perez (2017), among others, show that firms with large bank debt and low cash flows, as well as small firms and firms with low credit ratings, high price-earnings multiples, and Tobin's q, show a higher sensitivity to monetary policy shocks, which is in line with bank-lending, balancesheet, and interest-rate channels of monetary policy. Gorodnichenko and Weber (2016) show that firms with stickier output prices have more volatile cash flows and higher conditional volatility in narrow event windows around FOMC announcements.…”

Turnover Liquidity and the Transmission of Monetary Policy

“…31 To identify the effects of monetary policy shocks, we apply an identification scheme based on an external high-frequency instrument. 32 29 In Appendix 5.2 (Section D.2) we show that our estimates of β3 based on (20) are robust to including a number of additional controls, such as sensitivity to the three most common Fama-French factors, industry dummies, and a firm-specific measure of leverage (reliance on bank debt). 30 In Section 5.2, we used the change in the 3-month Eurodollar futures rate on the day of the FOMC announcement as a proxy for the unexpected component of the change in the true policy rate, i.e., the effective federal funds rate.…”

“…Together with the findings reported in Table 1 and Table 2, the results in Table 3 provide additional evidence that turnover liquidity is a quantitatively important channel that transmits monetary policy shocks to asset prices. 29…”

“…where D I is a dummy for the Fama-French ten-industry classification, L s t is the measure of the bank leverage of company s at date t constructed by Ippolito et al (2018), and β s jt is the "beta" corresponding to factor "f j,t " with j ∈ {1, 2, 3} for announcement day t that we estimated from the multi-factor regression (82) (recall f 1,t = M KT t , f 2,t = HM L t , and f 3,t = SM B t ; see Section B.3 for details). 64 All other variables are as defined in Section 5.3.…”

“…Ehrmann and Fratzscher (2004), for example, find that firms with low cash flows, small firms, firms with low credit ratings, firms with high price-earnings multiples, or firms with high Tobin's q exhibit a higher sensitivity to monetary policy shocks. Ippolito et al (2013Ippolito et al ( , 2018 find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks, while bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. Gorodnichenko and Weber (2016) document that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices.…”