We analyze the relationship between the degree of indebtedness in manufacturing industries and the response of their economic activity to monetary policy shocks in the euro area. The financial accelerator mechanism suggests that, the higher the leverage, the more sensitive production is likely to be to a monetary impulse. However, according to recent theoretical studies, this relationship could be attenuated at high levels of indebtedness by more severe financial constraints.
The paper provides empirical evidence of a non-linear relationship. For low leverage values, the relation is positive: more highly indebted industries adjust their production more markedly in response to a monetary policy shock. At sufficiently high levels of indebtedness, this relationship weakens to the point of changing sign. The attenuation is particularly evident in the short term and in the negative phases of the industrial production cycle.
Published in 2021 in: European Economic Review, v. 140, art. 103943
