Open AccessHow Does Monetary Policy Affect Prices of Corporate Loans?
Author(s) -
Seung Kwak
Publication year - 2022
Publication title -
finance and economics discussion series
Language(s) - English
Resource type - Journals
eISSN - 2767-3898
pISSN - 1936-2854
DOI - 10.17016/feds.2022.008
Subject(s) - monetary policy , monetary economics , loan , shock (circulatory) , economics , default , bond , bond market , differential (mechanical device) , credit channel , financial system , business , inflation targeting , finance , medicine , engineering , aerospace engineering
This paper studies the impact of unanticipated monetary policy news around FOMC announcements on secondary market corporate loan spreads. I find that the reaction of loan spreads to monetary policy news is weaker than that of bond spreads: following an unanticipated monetary policy tightening (easing) shock, loan spreads do not increase (decrease) as much as bond spreads do. Decomposition of the spreads into compensations for expected defaults and risk premiums shows that differential reactions of loan and bond risk premiums are the main driver of the differential spread reactions. This paper further finds that the weaker loan spread reactions to monetary policy shocks are more pronounced for riskier loans. Lastly, reactions of primary market loan spreads to monetary policy shocks are also muted. These findings highlight heterogeneous impacts of monetary policy across different types of corporate credit markets, possibly reflecting heterogeneous investor demand responses to monetary policy in those markets.