The credit channel of monetary policy before and after the zero lower bound: Evidence from the US equity market

I evaluate the effectiveness of conventional and unconventional monetary policy measures by examining the transmission mechanism through the credit channel before and after the zero lower bound (ZLB). I focus on the impact of conventional and unconventional policy shocks on a cross-section of portfolio returns sorted on characteristics that capture firms' financial constraints (size and book-to-market). Results show that the credit channel of monetary policy is even more relevant at the ZLB relative to the previous period, and its effectiveness is almost entirely attributed to the high sensitivity of financially constrained firms (small and value stocks) to unconventional surprises. I find strong evidence that the reaction of portfolio returns to policy shocks is asymmetric depending on the state of the economy (recession vs. expansion), type of policy surprise (positive vs. negative), and aggregate level of market volatility. My findings are robust to several model extensions and alternative specifications.