Monetary Policy, Debt Structure, and Credit Reallocation

Monetary tightening is associated with an expansion in business loans. Using microdata, I show that this expansion is driven by the countercyclical demands for loan financing among large unconstrained firms: they rebalance toward bank loans and away from corporate bonds as the spread of bonds over loans increases, while small firms raise more equity. To rationalize these findings, I estimate a heterogeneous-agent New Keynesian model where bank loans are senior and safer (collateralized) than defaultable bonds but issued at a greater intermediation cost. It implies that small risky firms disproportionately reduce their investment in response to interest rate hike.