Credit disintermediation and monetary policy

How does monetary policy affect corporate investment? This paper argues that the answer depends on how much firms rely on intermediated debt (loans), as opposed to arm’s length debt (bonds.) I study a model in which firms choose investment and the debt mix by trading off higher loan flexibility with the lower cost of bonds. Borrowing among bank-dependent firms responds less to monetary shocks than among bond-financed firms, while investment responds more. Moreover, bank-dependent firms tend to increase their reliance on banks following a tightening. I provide firm-level evidence consistent with these predictions. I also use the model to study how monetary pass-through changes as firms become less reliant on intermediated debt, as they appear to have in the data.