Heterogeneity in Corporate Debt Structures and the Transmission of Monetary Policy

We study how differences in the aggregate structure of corporate debt affect the transmission of monetary policy in a panel of euro area countries. Consistent with the bank lending view of transmission, we find the cost of bank loans to rise relative to the cost of corporate bonds in response to a standard monetary policy tightening shock. The strength of this effect depends on the financing structure prevailing prior to the shock. In economies with a high initial share of bond finance, the cost of credit rises by less as firms resort to bonds as a `spare tire' to compensate for the loan supply contraction and a smaller portion of firm credit is remunerated at the loan rate. In economies with a low share of bond finance, firms face a more limited scope to replace loans with bonds and the rise in the cost of credit is reinforced by a shift in the composition of credit demand towards bank loans. As a consequence, a higher share of bond finance goes along with a weaker transmission of standard monetary policy shocks to real activity. By contrast, the transmission of monetary policy shocks to longer-term yields tends to strengthen with the share of bond finance in the economy