We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to the contractual characteristics and the borrower–lender types of loans. We show that the puzzling increase in business loans in response to monetary tightening, documented before the Great Recession, is largely driven by drawdowns from existing commitments at large banks. Spot loans also rise and take a considerable amount of time to adjust. Banks, nonetheless, do curtail credit supply by shortening maturities of new loans. Following the Great Recession, the mechanism has worked differently, with loan responses to monetary tightening displaying a significant downward shift.
Using a Vector Autoregressive framework of analysis, we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty. This contraction takes two main, distinct forms. On the one hand, banks restrict their supply of spot funds, which we document using flows of loans and term loan originations. On the other, banks also curtail their provision of liquidity insurance, reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers ever drawing down on the lines.
We study the causal effect of unsought political connections on firm value. To address concerns of potential endogeneity and sample-selection bias we exploit the nationalization of Argentina's pension system, a unique natural experiment yielding exogenous variation in new political connections. We find unsought political connections to have a large negative effect on the value of newly connected firms. Yet this result only materializes when, in addition to becoming a shareholder, the government also obtains the right to appoint directors. Decreased stock liquidity or higher stock volatility do not explain this result, suggesting a channel that decreases expected cash flows to shareholders.
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