Will Lu, Banco Central de Chile

Paper: Monetary Policy and Firm Dynamics: The Financial Channel

Abstract: We combine administrative firm-level data, information from credit records, and monetary policy surprises for Chile to estimate the impact of changes in the monetary policy (MP) interest rate on investment and employment, and document the role of financial factors in the transmission of monetary policy. We find support for the financial channel of monetary policy, showing that only firms with debt see their investment and employment affected by changes in MP. We show that firms with high leverage levels and larger fractions of overdue debt are less sensitive to monetary policy. We document the role of age and size as additional factors of heterogeneity in the transmission of monetary policy.