Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297331 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2891
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We study how shocks to corporate leverage alter the macroeconomic transmission of monetary policy. We identify leverage shocks as idiosyncratic firm-level disturbances that are aggregated up to a size-weighted country-level average to generate a Granular Instrumental Variable (Gabaix and Koijen, forthcoming). Interacting this instrumental variable with high-frequency identified monetary policy shocks, we find that transmission to the price level strengthens in the presence of leverage shocks, while the real effects of monetary policy are unaffected. We show that this disconnect can be rationalized with an internal devaluation channel. Economies experiencing an increase in leverage exhibit a stronger monetary policy-induced contraction in domestic demand. This, however, is counteracted by a weaker contraction in exports, facilitated by their improved price competitiveness.
Subjects: 
Monetary policy transmission
Corporate leverage
Granular Instrumental Variable
Micro-to-macro analysis
JEL: 
C36
E22
E52
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6371-8
Document Type: 
Working Paper

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