The Impact of Corporate Risk Management on Monetary Policy Transmission: Some Empirical Evidence

42 Pages Posted: 13 Dec 2005

See all articles by Ingo Fender

Ingo Fender

Bank for International Settlements (BIS)

Date Written: November 2000

Abstract

Quite an impressive amount of recent academic research focuses on the idea that financial factors may cause or reinforce real fluctuations. In these models, it is typically a monetary policy shock that serves to lower the value of an asset which is used to secure a firm's borrowing, thereby generating broad credit channel effects of monetary transmission. We empirically investigate the impact of corporate risk management strategies on this specific transmission channel by using the seminal paper of Gertler and Gilchrist (1994) as a benchmark. A potentially important impact of corporate hedging is suggested by corporate finance models that generate hedge incentives by introducing asymmetric information into the credit markets, the assumption at the very heart of the available theories of a broad credit channel. The advent of liquid US interest rate derivatives markets in the mid-1970s should, therefore, serve as something like a turning point in the history of US monetary transmission. Credit channel effects should have been in operation prior to the introduction of these markets, while any such effect should have tended to vanish afterwards. In addition, we should be able to detect marked differences in the behaviour of small and large firms up to the 1970s in contrast to a broadly identical behaviour on the part of these firms in the period thereafter.

Keywords: Derivatives, Monetary Policy Transmission, VAR Models

JEL Classification: E44, E52, G31, G32

Suggested Citation

Fender, Ingo, The Impact of Corporate Risk Management on Monetary Policy Transmission: Some Empirical Evidence (November 2000). BIS Working Paper No. 95, Available at SSRN: https://ssrn.com/abstract=849065 or http://dx.doi.org/10.2139/ssrn.849065

Ingo Fender (Contact Author)

Bank for International Settlements (BIS) ( email )

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