The Transmission of Monetary Policy through Bank Lending: The Floating Rate Channel

Filippo Ippolito (), Ali Ozdagli and Ander Pérez-Orive
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Ander Pérez-Orive: https://www.federalreserve.gov/econres/ander-perez-orive.htm

No 2017-026, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We describe and test a mechanism through which outstanding bank loans affect the firm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to floating rates affect the liquidity, balance sheet strength, and investment of financially constrained firms that use bank debt. We show that firms---especially financially constrained firms---with more unhedged bank debt display stronger sensitivity of their stock price, cash holdings, sales, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, which further supports the floating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the floating rate channel can have a significant macroeconomic effect due to the large size of the aggregate stock of unhedged floating-rate business debt, an effect at least as important as the bank lending channel through new loans.

Keywords: Bank debt; Financial constraints; Firm balance sheet channel; Floating interest rates; Hedging; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E52 G21 G32 (search for similar items in EconPapers)
Pages: 105 pages
Date: 2017-03
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: The transmission of monetary policy through bank lending: The floating rate channel (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-26

DOI: 10.17016/FEDS.2017.026

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