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Foreign Monetary Policy and Firms' Default Risk

Research output: Working paper

Published
Publication date10/10/2017
Place of PublicationLancaster
PublisherLancaster University, Department of Accounting and Finance
Number of pages86
Original languageEnglish

Abstract

This study documents the relationship between foreign monetary policy and firms' ex-ante forward-looking default probability measures. We analyze market based measures of default for large non-financial firms in the US and the EMU area. We propose two transmission mechanisms of foreign policy shocks: the foreign demand channel and the foreign debt channel. We show that foreign monetary policy influences firms' default probability largely through the foreign demand channel. We find that the foreign debt channel only played a role for European firms during the early 2000s due to the higher exposure to USD denominated obligations. These results highlight the need for macro-prudential authorities to pay more attention to the foreign demand channel in the struggle against large default events, as the results show that the foreign debt channel is less relevant.