Monetary Policy and Firm Heterogeneity: The Role of Leverage Since the Financial Crisis

Abstract

We study how leverage determines firm-level responses to monetary policy. Using both high-frequency financial market and quarterly investment data, we find that the role of leverage in monetary transmission changed around the financial crisis of 2007-09. Firms with high leverage were less responsive to monetary policy shocks in the pre-crisis period but have become more responsive since the crisis. The higher responsiveness is driven by firms whose leverage is more dependent on long-term debt, suggesting an outsize role for monetary policy affecting long-term funding conditions since the crisis. We also find suggestive evidence for transmission through changes in monetary policy uncertainty.