Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity‐Based Identification in a Model with Regimes

Massimo Guidolin, Manuela Pedio, Valentina Massagli

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

We investigate the effects of the Federal Reserve's quantitative easing and maturity extension programs on the yields of US dollar-denominated corporate bonds using a multiple-regime heteroskedasticity-based VAR identification approach. Impulse response functions suggest that a traditional, rate-based expansionary policy may lead to an increase in yields while quantitative easing is linked to a general and persistent decrease in yields, particularly for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost of private debt primarily through a reduction in risk premia that cannot be entirely accounted for by a reduction in corporate default risk.
Original languageEnglish
Pages (from-to)1804-1833
Number of pages30
JournalEuropean Journal of Finance
Volume27
Issue number18
DOIs
Publication statusPublished - 21 Apr 2021

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