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, Revised in June 2019
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

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, high credit ratings, and large “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 their marginal cost of financing investment is relatively flat. The aggregate effect of monetary policy therefore depends on the distribution of default risk, which varies over time.

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Document Object Identifier (DOI): 10.3386/w24221

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