Global Corporate Bond Markets and Local Monetary Policy Transmission [Job Market Paper]
Abstract: When tight monetary policy curtails domestic supply of credit and raises domestic borrowing costs, firms that tap foreign bond markets to obtain cheaper funding can isolate themselves from contractionary effects of monetary tightening. This paper investigates whether this prediction holds for non-financial companies in the euro area. I first show that euro area firms exploit borrowing cost differentials between USD and EUR by issuing corporate bonds in USD whenever it becomes a cost-effective option. Using proxies for such opportunistic borrowing behavior, I then find that firms capable of seizing these opportunities in global corporate bond markets do not reduce their fixed capital investment to the same extent as other firms in response to monetary tightening. Further findings reveal that this differential firm response is driven by cost-saving opportunities of issuing in global corporate bond markets and not by other types of asymmetries of financial constraints between firms. Overall, these findings confirm that there is significant heterogeneity in firms’ investment reactions to monetary policy stemming from their varying access to global corporate bond markets which might lead to an impaired transmission mechanism when global financial markets emerge as alternative funding sources to firms.
Are All Exchange Rate Depreciations the Same? (with Jakob de Haan)
Abstract: Existing empirical works that study the impact of exchange rates on firm-level outcomes predominantly use bilateral exchange rates vis à vis the US dollar. However, bilateral exchange rate changes can arise from changes in local economic conditions (locally-induced) or from the US (US-induced), leading to different channels at work. In this paper, using matched foreign currency bond & loan-level and firm-level data for 17,855 firms from 19 EM/DC,we identify international trade, balance sheet and global dollar credit channels to study differential impacts of locally-induced vs US-induced exchange rate changes on firm-level investment. We have three main findings. First, when an exchange rate depreciates due to a stronger dollar, tradable sector firms reduce their investment. This is the opposite of what the traditional trade channel predicts, corroborating the findings of Bruno and Shin (2023) for firm investment. Second, a US-induced exchange rate depreciation leads to lower investment for non-tradable sector firms with outstanding FX debt. Third, we offer evidence for the existence of a global dollar credit channel that is exclusive to US-induced changes. When the exchange rate depreciation is due to a stronger dollar, which is often associated with tighter global dollar credit conditions, FX debt issuing firms reduce their investment.
The Global Financial Cycle and State-Dependent Local Monetary Policy Transmission (with Jamus Lim)
Abstract: The effectiveness of monetary policy is likely to vary conditional on the state of the global financial cycle (GFCy) due to various international funding channels. When global liquidity is abundant, firms and banks can substitute domestic funding with foreign funding, and thereby impair monetary policy transmission. In this paper, we test whether this hypothesis holds for a panel of countries using a state-dependent panel local projections model with various identification schemes. Utilizing different measures that proxy the GFCy, our findings suggest that monetary policy is much less effective during the expansion phase of the GFCy, echoing the international policy “dilemma” argument of Rey (2016).
Firm-Level Effects of Monetary Policy Divergence between the Federal Reserve and the ECB (with Özgen Öztürk) (in progress)