MIDDLE EAST TECHNICAL UNIVERSITY

Department of Economics Seminar Series 

"Debt Contracts, Investment, and Monetary Policy"

by

Özgen Öztürk

(Oxford University)

Date: March 25, 2024 (Monday)

Time: 14:00

Synchronous Online Seminar

MS Teams Platform

MS Teams Link

Meeting ID: 246 506 859 070

Passcode: ZyU89E

Abstract

This paper studies the effect of asset-based versus cash flow-based debt contracts on the transmission of monetary policy to firm-level investment and borrowing. Using information from detailed loan-level data matched with balance sheet data and stock return data, I document that in response to a contractionary monetary shock, asset-based borrowers experience sharper contractions in borrowing and investment than cash flow-based borrowers. Despite the fact that asset-based borrowers contribute only 15% to aggregate investment, they are responsible for 64% of the total investment response. To understand the channels and provide a microfoundation for the endogenous choice of these debt contracts, I set up a heterogeneous firm New Keynesian model with limited enforceability. The quantitative model shows that the traditional collateral channel explains this heterogeneous sensitivity as cash flow-based borrowers are less susceptible to collateral damage from changes in asset prices. This result indicates that the prevalence of asset-based debt contracts increases the strength of the financial accelerator channel and thereby shapes monetary policy transmission.