Floating-rate debt amplifies tightening for euro area firms
A Banca d'Italia working paper quantifies how floating-rate debt amplified the 2022-23 monetary tightening for euro area firms. The study estimates significant reductions in investment for highly exposed companies.
Investment hit by floating-rate repricing
A Banca d'Italia study quantifies the impact of the 2022-23 tightening cycle on euro area firms through their exposure to floating-rate bank debt.
Researchers found that a 450 basis point increase in the 3-month Euribor rate, as observed during that period, reduced the investment rate of companies with a high share of floating-rate debt (at or above the 75th percentile) by an additional 14.8 percentage points compared to those with only fixed-rate debt.
This effect is substantial, considering the average investment rate in the sample was 14 percent.
The paper employs an innovative instrumental variable (IV) approach to isolate the causal effect.
It instruments firms' floating-rate exposure with the random exposure of their lenders to retail deposit inflows stemming from the ECB's Asset Purchase Programme (APP).
This method addresses the endogeneity between a firm's loan structure and its real activity outcomes, providing robust causal identification.
The analysis covers firms from Germany, Italy, Spain, Belgium, and the Netherlands.
Heterogeneous impact across firms
The study distinguishes the floating-rate channel, affecting outstanding debt, from the bank lending channel.
This is crucial for the Euro Area's diverse bank debt composition.
Beyond investment, the research explores impacts on employment, sales, and operating profits.
The negative interaction between floating-rate debt and reference rate changes is widespread across manufacturing, services, and construction.
However, the direct residual effect on investment is mainly observed in the service sector.
Significantly, the study reveals a more severe impact on smaller firms.
These companies experience notable reductions in employment, sales, and profits, and may even liquidate assets to meet increased debt burdens.
A critical blind spot for policy
This paper uncovers a critical, often underestimated, channel of monetary policy transmission that policymakers must integrate into their assessments.
The findings underscore the necessity for central banks to account for the heterogeneity in firms' debt structures when gauging the intensity of monetary restrictions.
The disproportionate impact on smaller firms, leading to broader reductions in employment and sales, carries significant implications for economic resilience and the design of targeted support measures.