Debt limits and monetary policy during the euro area crisis

ABSTRACT

We study the debt limits of non-financial firms, and the influence of monetary policy via this channel during the global financial crisis in the euro area. The estimations indicate that monetary policy was initially effective in fending of a fall in the debt limits. After the monetary policy channel peaked in the vicinity of the zero-lower bound, however, the debt limits of non-financial firms contracted by almost a fifth. The tightening of the debt limits directly influenced firms that hold almost a tenth of corporate assets. The estimations furthermore provide evidence of structural shifts in credit use that contributed to the sluggish economic dynamism during the crisis period.

KEYWORDS:

• Debt limits
• economic cycles
• euro area
• stochastic frontier analysis

JEL:

• D21
• D22
• E44
• G01
• F44

Acknowledgement

We thank participants at the WEAI conference in Tokyo, and workshop participants at the IMF and the Bank of Finland. The views expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland, the IMF or of its Board

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The statistics cited here do not include marketable debt instruments based on ECB (2012), but qualitatively similar conclusions apply to total corporate debt.

Additional information

Funding

The work was supported by the International Monetary Fund; Suomen Pankki.