Working Papers

We examine how financial frictions shape the transmission of monetary policy using the cross-sectional heterogeneity in firms' excess bond premia (EBPs), the risk premium component of firms' credit spreads linked to investors' risk appetite. First, we find that while surprise monetary policy easings compress credit spreads more for higher-EBP firms---i.e., for firms whose default risk loads more on aggregate risk---lower-EBP firms' investment responds by more.  Second, we show that credit supply shocks replicate monetary policy's heterogeneous effects, whereas credit demand shocks elicit homogeneous responses across firms. Third, we demonstrate that only a model with financial frictions in which lower-EBP firms have flatter capital demand curves, rather than flatter supply curves as previously argued, can rationalize our more-comprehensive set of empirical moments. 

Using firm-bank matched administrative data, we study how U.S. firms' financial conditions are affected by surprises about data releases of foreign economies.  First, positive foreign economic surprises act as favorable demand shocks to U.S. loan markets, increasing loan utilization and interest rates. Second, firms borrowing against their earnings, rather than their assets, face larger increases in loans, smaller increases in interest rates, and larger decreases in default risk. Third, collateral values are unchanged unconditionally and relatively higher for firms borrowing against their earnings, instead of their assets. To rationalize these results, we build a model in which endogenous default risk plays the main role in loosening firms' borrowing constraints, rather than the  previously emphasized feedback between asset prices and asset-based collateral constraints.