Employment and the Collateral Channel of Monetary Policy

Abstract

This paper uses detailed firm-level data to show that monetary policy affects employment through housing collateral and corporate debt. Our research design exploits the fact that many small and medium-sized enterprises use their directors' homes as a key source of collateral for corporate loans, but directors typically live in a different region to their firm. This spatial separation of firms from their collateral allows us to distinguish the collateral channel from local demand effects. We find that younger and more levered firms with higher exposure to housing collateral fluctuations adjust employment the most following a change in monetary policy. The collateral channel explains a sizeable share of the aggregate employment response.