Corporate debt structure and heterogeneous monetary policy transmission

Using French firms’ balance sheet data, we show that corporate debt structure plays a significant role in ECB monetary policy transmission. In addition to interest rate policy, we analyse the impact of a novel ECB-induced bond liquidity shock. While both types of policy tightening diminish French firms’ investment, the transmission of conventional monetary policy shocks is stronger for firms with a higher share of bank debt. Conversely, contractionary bond liquidity shocks lower investment more for firms with higher bond shares of total debt. We further investigate the transmission channels and show that bond liquidity tightening reduces French sovereign bond market liquidity and leads to higher bond-bank loan interest rate spreads and lower bond issuance.