The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program

Abstract

This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve's maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP's announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of "reach for yield" behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market. JEL: E52, G23, G32

A survey of empirical findings on unconventional central bank policies

“…Effects on stock prices in the Euro area have also been under investigation. Foley-Fisher et al (2016) provide evidence that the Maturity Extension Program has brought about a relief in firms' financial constraints and lead to higher output for these firms. Their stock prices are found to have been higher, as well as employment and investment.…”

“…As noted by Jones and Kulish (2013), evidence indicates that additional liquidity in the US drives down risk premia. Foley-Fisher et al (2016) argues that bond market risk premia became lower during the MEP, especially for firms issuing longer-term riskier debt.…”

Misallocation Costs of Digging Deeper into the Central Bank Toolkit

“…Chakraborty et al (2016) show banks that are more active in the MBS market reduce commercial lending subsequent to QE by the Fed, inducing the firms borrowing from these banks to reduce investment. Foley-Fisher et al (2016) present evidence that the Federal Reserve's maturity extension program had a greater effect on the valuation, investment, and employment of firms which were more dependent on long-term debt.…”

Employment Effects of Unconventional Monetary Policy: Evidence from QE

“…Previous studies on the effect of unconventional monetary policy in the United States have mostly focused on outcomes other than employment. For instance, recent studies have investigated the effects of QE on aggregate financing cost (Hancock and Passmore, 2011;Gilchrist et al, 2015) or on outcomes in the housing market and at the household level (Di Maggio et al, 2016;Beraja et al, 2018), at the bank level (Darmouni and Rodnyansky, 2017;Kurtzman et al, 2017), or at the firm level (Foley-Fisher et al, 2016;Chakraborty et al, 2016). 4 Our analysis of bank lending is closely related to Darmouni and Rodnyansky (2017) and Di Maggio et al (2016), who exploit cross-sectional variation in MBS holdings.…”

“…As we document, only the additional lending subsequent to QE3 had a significant effect on overall employment and is arguably driven by credit supply rather than credit demand. Foley-Fisher et al (2016) and Chakraborty et al (2016) study the effect of unconventional monetary policy on firm behavior. In particular, Foley-Fisher et al (2016) investigate the effects of the monetary expansion program (MEP), on non-financial firms and they find that firms that historically relied more on long-term debt issued more long-term debt after the MEP and that those firms increased investment.…”