Crossing the credit channel: credit spreads and firm heterogeneity

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 07 February 2020

Staff Working Paper No. 854

By Gareth Anderson and Ambrogio Cesa-Bianchi

Credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default. Our results suggest that frictions in the financial intermediation sector play a crucial role in shaping the transmission mechanism of monetary policy.

This version was updated in October 2020.

PDFCrossing the credit channel: credit spreads and firm heterogeneity