Abstract
We study how financial heterogeneity determines firm-level investment responses to monetary policy shocks. In Compustat, a significant number of firms hold almost zero debt, and among the firms who hold debt, both the amount and the maturity of debt vary greatly. We refer to these financial heterogeneity characteristics as lumpy debt. We first document that lumpy debt significantly affects the responses of firm investment to monetary policy shocks: firms who hold debt, hold more debt, and hold more long-term debt, are less responsive to monetary policy shocks. We then develop a heterogeneous firm model with investment, long-term and short- term debt, and default risk to interpret these facts. In the model, firms with higher leverage or more long-term debt are less responsive to monetary policy shocks because their marginal cost of external finance is high. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of firm financial positions.
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