The Credit Channel of Monetary Policy Before and After the ZLB: Evidence from the US Equity Market

We evaluate the effectiveness of conventional and unconventional monetary policy measures by examining the transmission mechanism through the credit channel before and after the zero lower bound. We focus on the impact of conventional and unconventional policy shocks on the cross-section of portfolio returns sorted on a few characteristics that capture firms’ financial constraints (size, book-to-market). Our results show that the credit channel of monetary policy is even more relevant at the ZLB relative to the previous period and its effectiveness is almost entirely attributed to the high sensitivity of financially constrained firms (small and value stocks) to unconventional surprises. We find strong evidence that the reaction of portfolio returns to policy shocks is asymmetric depending on the state of the economy (recession vs. expansion), the type of policy surprises (positive vs. negative surprises), and the aggregate level of market volatility. Our findings are robust with respect to a number of model extensions and robustness checks. JEL Classification: G14, E44, E52, E58.