Credit Surfaces, Economic Activity, and Monetary Policy

Abstract

A synthesis of new and old approaches in understanding macroeconomic fluctuations and the role of monetary policy (MP) is the credit surface, where the interest rate is a function of multiple credit terms: leverage, credit rating, term, etc. We gauge credit conditions using the credit surface in mortgage, corporate bond, and peer-to-peer lending markets, and explore its relationship with economic activity in these segments of the economy. In addition, we study the transmission of MP through the corporate bond credit surface. Our results suggest that the passthrough of MP is heterogeneous and non-monotonic in ex-ante riskiness, initially declining as risk increases but then increasing. Our preliminary results support the view that the credit surface is important for macroeconomic fluctuations and the transmission of MP.