Monetary policy under multiple financing constraints

We revisit the credit channel of monetary policy when firms face multiple financing constraints, a common feature of corporate financing we document empirically. Our theory shows that the multiplicity of constraints dampens the transmission of expansionary policy to firm borrowing and investment notably but amplifies the transmission of policy tightening. This asymmetry arises because, when policy tightens (eases), the most (least) responsive constraint binds. Using U.S. firm-level data and exploiting a quasi-natural experiment, we find strong support for these predictions and for our proposed channel. Embedding the mechanism into a New Keynesian framework, we find that the drop in investment after contractionary shocks is twice as large as its increase following equally-sized expansionary shocks, thus providing an explanation for why monetary policy tightenings have stronger effects than easings, a longstanding puzzle in monetary economics. Moreover, our analysis implies that the effectiveness of monetary policy is strongly determined by the distribution of financial constraints across firms and that similar asymmetries likely characterize the transmission of other macroeconomic shocks.