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The impact of macroeconomic and monetary policy shocks on the default risk of the euro-area corporate sector

Author

Listed:
  • Marco Lo Duca

    (ECB)

  • Diego Moccero

    (ECB)

  • Fabio Parlapiano

    (Bank of Italy)

Abstract
We analyse the impact of macroeconomic and monetary policy shocks on corporate default risk as measured by firms' probabilities of default (PDs) for the four largest euro area countries. We estimate the impact of shocks on one-year PDs using local projections. For the period 2014-19, we find that these shocks significantly affect the dynamics of default risk. A contractionary supply shock leads to a deterioration of firms' riskiness by 10 per cent above the average PD. Similar effects are found for adverse monetary policy shocks. Firms' responses to shocks vary depending on their characteristics and degree of financial constraints. Smaller firms are affected to a larger degree. Firms’ outstanding indebtedness and debt repayment capacity are an important transmission channel for these shocks, but the accumulation of cash reserves helps build resilience.

Suggested Citation

  • Marco Lo Duca & Diego Moccero & Fabio Parlapiano, 2024. "The impact of macroeconomic and monetary policy shocks on the default risk of the euro-area corporate sector," Temi di discussione (Economic working papers) 1460, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1460_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1460/en_tema_1460.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    corporate default risk; demand and supply-driven inflation shocks; monetary policy shocks; local projections;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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