The transmission of monetary policy through bank lending: The floating rate channel

Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy can directly affect the liquidity and balance sheet strength of firms through existing loans. We show that firms-especially financially constrained firms-with more unhedged loans display a stronger sensitivity of their stock price, cash holdings, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, revealing a new limitation of unconventional monetary policy. The floating-rate channel is at least as important as the bank lending channel operating through new loans.