I study how the use and structure of debt covenants affect real business activity and pass-through of monetary policy using a newly constructed dataset of corporate debt covenants in Australia. I find that exposure to debt covenants disciplines firms' investment and staff expenses even in the absence of covenant breaches. In addition, covenants with interest coverage limits appear to amplify the transmission of monetary policy shocks while other types of covenants appear to mitigate transmission. As such, the shift from interest coverage limits to other types of covenants that appears to have occurred since the late 2000s may have lowered the responsiveness of investment to monetary policy, and in turn accounted for some of the surprising weakness in non-mining investment over the past decade.
I examine whether and how local income inequality affects household debt and its composition using household panel data for Australia from the Household, Income and Labour Dynamics in Australia Survey. I find that middle-income households without liquidity and credit constraints tend to borrow more for non-residential investment purposes as local income inequality rises, suggesting that they are trying to close the income gap. They also appear to try to close the consumption gap by accumulating more car debt with a rise in local income inequality. Both findings are consistent with households 'keeping up with the Joneses', but unlikely to have implications for macrofinancial stability given that households taking on debt appear well resourced.
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