18. July 2022

Tighter Monetary Policy Hits Firms with Short Debt Maturity First, Study Says Press Release: Tighter Monetary Policy Hits Firms with Short Debt Maturity First

As consumer prices soar around the globe, central banks’ reactions have moved to the forefront again. Inflation jumped to more than eight percent in the US and the European Union, causing concern about rapid interest rate hikes and their economic consequences.

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Not only the level of debt (leverage) matters when interest rates rise, but also the timing when this debt comes due, economists Joachim Jungherr of the University of Bonn, Matthias Meier and Timo Reinelt from the University of Mannheim and Immo Schott from the University of Montreal argue in a recent study.

“Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk),” the authors explain. “These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang).” The authors scrutinised data for bond-issuing US firms between 1995 and 2018. Corporate bonds have long maturities with an average remaining time to maturity of nine years, and constitute more than 60 per cent of total debt.

Firms’ investment is more responsive to monetary policy shocks, such as a fast and possibly surprising upswing in interest rates, when a higher proportion of their debt matures. After a tightening of monetary policy, investment, borrowing, sales and employment all fall by more for firms with high shares of maturing debt.

“Debt maturity matters because of two channels: roll-over risk and debt overhang,” the economists explain. Roll-over needs make firms with higher shares of maturing debt more sensitive to changes in interest rates. Long-term debt insures firms against roll-over risk but creates debt overhang which leads to higher default risk and lower investment.

The economists further show that the effects of debt overhang are distortive for firms with high default risk, so these firms borrow at shorter maturities. Therefore, younger and smaller companies pay higher credit spreads and have higher maturing debt shares. Aggregate effects of monetary policy shocks comprise a decrease of gross domestic product, consumption and investment. The real interest rate increases more than the nominal rate because inflation falls. The associated decline in aggregate demand causes a reduction in output prices.
This reduces firms’ demand for capital and labor and decreases the wage and the price of
capital goods.

Roll-over risk and debt overhang both contribute to the result that investment falls by more for firms with a higher share of maturing debt after a contractionary monetary policy shock. Importantly, interest rate hikes depress inflation and GDP when firms face debt overhang.

All in all, debt maturity deserves attention when central banks assess the effects of a monetary policy tightening. “We conclude that the maturity of firm debt and its distribution are important for the aggregate effects of monetary policy,” the authors said.

The presented discussion paper is a publication without peer review of the Collaborative Research Center
(CRC) Transregio 224 EPoS. Access the full discussion paper here. Find the list of all discussion papers of the
CRC here.


  • Joachim Jungherr, member of the Collaborative Research Center Transregio 224 EPoS and Postdoctoral
    Researcher at the University of Bonn
  • Matthias Meier, member of the Collaborative Research Center Transregio 224 EPoS and Assistant Professor at
    the University of Mannheim
  • Timo Reinelt, member of the Collaborative Research Center Transregio 224 EPoS and Ph.D. candidate in
    economics at the University of Mannheim
  • Immo Schott, Associate Professor at the Université de Montréal and research Fellow at CIREQ (Centre
    Interuniversitaire de Recherche en Économie Quantitative)

The Collaborative Research Center (CRC) Transregio 224 EPoS
Established in 2018, the Collaborative Research Center Transregio 224 EPoS, a cooperation of the universities Bonn and Mannheim, is a long-term research institution funded by the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG). EPoS addresses three key societal challenges: how to promote equality of opportunity; how to regulate markets in light of the internationalization and digitalization of economic activity; and how to safeguard the stability of the financial system.

For further information and interview requests, please contact the author of the study:
Matthias Meier
Department of Economics
Mannheim University
Tel: +49 621 181–3430
Email: m.meier@uni-mannheim.de

Discussion Paper No. 360
Project C 05, C 02
Corporate Debt Maturity Matters for Monetary Policy

  • Joachim Jungherr
  • Matthias Meier
  • Timo Reinelt
  • Immo Schott



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