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  5. Monetary Policy Transmission
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Monetary Policy Transmission

Paper Session

Sunday, Jan. 4, 2026 2:30 PM - 4:30 PM (EST)

Loews Philadelphia Hotel, Franklin
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Rebecca Zarutskie, Federal Reserve Bank of Dallas

Indirect Credit Supply: How Bank Lending to Private Credit Shapes Monetary Policy Transmission

Sharjil Haque
,
Federal Reserve Board
Young Soo Jang
,
Pennsylvania State University
Jessie Jiaxu Wang
,
Federal Reserve Board

Abstract

This paper examines how banks' financing of nonbank lenders affects monetary policy transmission. Using supervisory bank loan-level data and deal-level private credit data, we document the rise of an intermediation chain: Banks lend to Business Development Companies (BDCs)---large players in private credit market---which then lend to firms. As monetary tightening restricts bank lending, firms turn to BDCs for credit, prompting BDCs to borrow more from banks. However, this intermediation chain raises borrowing costs, as banks charge BDCs higher rates, which BDCs pass on to firms. Consistent with this pass-through, bank-reliant BDCs respond more strongly to monetary tightening. Overall, bank lending to nonbanks mitigates credit supply contraction during tightening, but amplifies monetary transmission by increasing borrowing costs.

Firm Market Power Channel of Monetary Policy Transmission

Nishant Kashyap
,
Indian Institute of Management-Ahmedabad
Prasanna Tantri
,
Indian School of Business

Abstract

We ask whether monetary policy shocks can influence market concentration levels in industries due to their disproportionate impact on the borrowing capacity of financially constrained firms. Using a natural experiment in India that made firms having investments in plant and machinery above a threshold limit eligible for a directed lending program, we show that the presence of financially constrained firms influences the responsiveness of market concentration levels to monetary policy shocks. A rate hike (cut) disproportionately impacts financially constrained firms and leads to an increase (decrease) in the power of unconstrained firms in the industry. Thus, a rate hike (cut) is associated with an increase (decrease) in markups, leading to a slowdown in the transmission of monetary policy shocks to prices. Thus, we highlight a hitherto unexplored channel--the market concentration channel--of transmission of monetary
policy shocks into prices.

External Finance Premium: Market Finance versus Bank Finance

Livia Chitu
,
European Central Bank
Sofia Gori
,
European Central Bank and Goethe University
Refet S. Gurkaynak
,
Bilkent University

Abstract

This paper is the first to simultaneously examine firms’ market-based and bank-based external finance premia and investigate the behavior of corporate bond markets in the United States and the euro area, with a focus on country- and state-level heterogeneity in monetary unions. Using a unique micro-level dataset, we show that market finance premia, measured with corporate bond spreads, are remarkably similar in both the euro area and the US in terms of how little they depend on the issuer’s state or country of origin. In neither monetary union is the transmission of monetary policy to corporate bond rates differentiated as a function of the state or country of issuer. Unconditionally, the state or country of origin of the bond issuers explains very little of the variance among corporate bond spreads, in stark contrast to bank loan spreads that are determined at the country level. The euro area corporate bond market is as integrated as the US one, contrary to conventional beliefs. The marked difference between country influences on bank loan and corporate debt spreads is not due to selection effects in bond issuing firms but owes directly to the nature of market finance.

Discussant(s)
Sergey Chernenko
,
Purdue University, Mitch Daniels School of Business
Judit Temesvary
,
Federal Reserve Board
Christina Wang
,
Federal Reserve Bank of Boston
JEL Classifications
  • G2 - Financial Institutions and Services
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit