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Faculty of Economics

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Ferreira, T. R. T., Ostry, D. A., Rogers, J.

Firm Financial Conditions and the Transmission of Monetary Policy


Abstract: We study how firms' investment responses to monetary policy depend on their financial conditions, finding a major role for their excess bond premia (EBP), the component of their credit spreads in excess of default risk. While monetary policy easings compress credit spreads more for firms with higher EBPs, it is lower-EBP firms that invest more. We rationalize these findings with a model in which lower-EBP firms have flatter marginal benefit curves for capital, reflecting their more resilient investment prospects. Consistent with our model, we show that the transmission of monetary policy to aggregate investment depends on the cross-sectional EBP distribution.

Keywords: Excess Bond Premium, Investment, Monetary Policy, Firm Heterogeneity

JEL Codes: E22 E44 E50

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