NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Financial Heterogeneity and the Investment Channel of Monetary Policy

Pablo Ottonello, Thomas Winberry

NBER Working Paper No. 24221
Issued in January 2018
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

We study the role of heterogeneity in firms' financial positions in determining the investment channel of monetary policy. Empirically, we show that firms with low leverage or high credit ratings are the most responsive to monetary policy shocks. We develop a heterogeneous firm New Keynesian model with default risk to interpret these facts and study their aggregate implications. In the model, firms with high default risk are less responsive to monetary shocks because their marginal cost of external finance is high. The aggregate effect of monetary policy therefore depends on the distribution of default risk across firms.

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Document Object Identifier (DOI): 10.3386/w24221

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