Abstract: Unconventional monetary policy supporting the supply of credit to firms (credit policy) has become a standard element of the central bank policy toolkit. Using a panel local-projections instrumental-variable approach, I uncover a large degree of asymmetry and heterogeneity in the investment effects of credit supply shocks. I find that smaller firm size, lower age, and higher default risk are associated with stronger responses to credit supply contractions. In contrast, the relationship between these characteristics and the responsiveness to credit expansions is insignificant or even negative. A theoretical model with financial intermediaries subject to occasionally binding financing constraints can rationalize these findings.

Keywords: Credit Supply, Credit Policy, Firm Heterogeneity, Investment 

JEL Classification: E22, E44, E51, E58

Presented at: 29th International Conference Computing in Economics and Finance (Nice), 54th Annual Conference of the Money, Macro and Finance Society (Portsmouth)

Abstract: I study the role of firm heterogeneity for the transmission of unconventional monetary policy in the form of "credit policy" à la Gertler and Karadi (2011). To this end, I lay out a Two-Agent New-Keynesian model with financially constrained and unconstrained firms and a financial intermediary with an endogenous leverage constraint. I find that, when firms are heterogeneous, aggregate investment is substantially less responsive to credit policy compared to an identical firm setting. Moreover, when debt markets are segmented, credit policy directed exclusively at financially unconstrained firms is most effective. My paper provides a tractable framework to illustrate mechanisms through which firm heterogeneity affects the transmission of credit policy. According to my findings, the presence of firm heterogeneity can be expected to make credit policy less effective than predicted by a representative agent framework.

Keywords: Credit Policy, Firm Heterogeneity, Investment, Financial Frictions

JEL Classification: E50, E52, E58

Presented at: 15th RGS PhD Conference in Economics (online), RCEA Conference on Recent Developments in Economics, Econometrics and Finance (online), EEA-ESEM 2022 (Milan), VfS Annual Meeting 2022 (Basel)