Financial Constraints and the Transmission of Monetary Policy: Evidence from Relaxation of Collateral Constraints

68 Pages Posted: 15 Apr 2020 Last revised: 11 Oct 2023

See all articles by Nishant Vats

Nishant Vats

Washington University in Saint Louis, John M. Olin Business School

Date Written: March 25, 2020

Abstract

How do financial constraints affect the transmission of monetary policy? I examine this question using the staggered enactment of anti-recharacterization legislation as a source of exogenous variation in creditor rights that loosens firm-financial constraints. A 25 basis-point expansionary monetary policy shock results in a 2 percentage-point higher investment growth among treated (unconstrained) firms. Using a Heterogeneous-Firm-New-Keynesian model, I estimate that the law relaxed firm collateral constraint by 13%. The model highlights the mechanism that the relaxation of collateral constraint flattens the firm marginal cost curve, which amplifies responses to shifts in the marginal benefit curve due to monetary policy shocks.

Keywords: Creditor Rights, Monetary Policy, Financial Frictions, Investment

JEL Classification: D22, K20, E22, E43, E52, G31

Suggested Citation

Vats, Nishant, Financial Constraints and the Transmission of Monetary Policy: Evidence from Relaxation of Collateral Constraints (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3559650 or http://dx.doi.org/10.2139/ssrn.3559650

Nishant Vats (Contact Author)

Washington University in Saint Louis, John M. Olin Business School ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
383
Abstract Views
2,095
Rank
141,242
PlumX Metrics