This paper studies the effect of asset-based versus cash flow-based debt contracts on the transmission of monetary policy to firm-level investment and borrowing. Using information from detailed loan-level data matched with balance sheet data and stock return data, I document that in response to a contractionary monetary shock, asset-based borrowers experience sharper contractions in borrowing and investment than cash flow-based borrowers. Despite the fact that asset-based borrowers contribute only 15% to aggregate investment, they are responsible for 64% of the total investment response. To understand the channels and provide a microfoundation for the endogenous choice of these debt contracts, I set up a heterogeneous firm New Keynesian model with limited enforceability. The quantitative model shows that the traditional collateral channel explains this heterogeneous sensitivity as cash flow-based borrowers are less susceptible to collateral damage from changes in asset prices. This result indicates that the prevalence of asset-based debt contracts increases the strength of the financial accelerator channel and thereby shapes monetary policy transmission.
R&R at AEJ: Macro
This paper studies the determinants of TFPR, a revenue-based measure of total factor productivity. Recent business cycle models are built upon the assumption of countercyclical dispersion in TFPR. But, the distribution of TFPR is endogenous, dependent upon exogenous shocks and the endogenous determination of prices. An overlapping generations model with monopolistic competition and state dependent pricing is constructed to study the factors that shape the TFPR distribution. The empirical focus is on three key data patterns: (i) countercyclical dispersion of TFPR, (ii) countercyclical dispersion of price changes and (iii) countercyclical frequency of price adjustment. The analysis uncovers two interesting scenarios in which these moments are matched. One arises in the presence of shocks to the dispersion of TFPQ, a quantity based measure of total factor productivity, along with a negatively correlated change in the mean of TFPQ. The second arises if the monetary authority responds to shocks to the dispersion of TFPQ by "leaning against the wind". Due to state contingent pricing, the model is nonlinear. Simple correlations mask these nonlinearities of the underlying economy. The real effects of monetary innovations are state dependent, with monetary policy less effective in recessions.
How does the dispersion of firm-level shocks affect the investment channel of monetary policy? Using firm-level panel data, we construct several measures of dispersion of productivity shocks, time-pooled and time-varying, and interact high-frequency identified monetary policy shocks with these measures of idiosyncratic shock volatility. We document a novel fact: monetary policy has dampened real effects via the investment channel when firm-level TFP shock volatility is high. Our estimates for dampening effects of volatility are statistically and economically significant - moving from the tenth to the ninetieth percentile of the volatility distribution approximately halves point estimates of impulse response functions to contractionary monetary policy shocks. Given that dispersion rises in recessions, these findings offer further evidence as to why monetary policy is weaker in recessions, and emphasize the importance of firm heterogeneity in monetary policy transmission.