The impact of unconventional monetary policy on firm financing constraints: evidence from the maturity extension program

Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison

Working Paper

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 financing constraints. It focuses on the Federal Reserve?s maturity extension program (MEP), which was 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 with stronger balance sheets. There is also evidence of ?reach for yield? behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. Our results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.

Keywords: Quantitative easing; Unconventional monetary policy; Preferred habitat; Financial constraints;

JEL Classification: E5; G3;