We examine both theoretically and empirically a mechanism through which outstanding bank loans a¤ect the …rm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have ‡oating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to ‡oating rates a¤ect the liquidity, balance sheet strength, and investment of …nancially constrained …rms that use bank debt. We show that …rms-especially …nancially constrained …rms-with more unhedged bank debt display a stronger sensitivity of their stock price, cash holdings, sales, inventory, and …xed capital investment to monetary policy. This e¤ect disappears when policy rates are at the zero lower bound, which further supports the ‡oating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the ‡oating rate channel can have a signi…cant macroeconomic e¤ect due to the large size of the aggregate stock of unhedged ‡oating-rate business debt, an e¤ect that is at least as important as the bank lending channel that operates through new loans.
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