Title page

Contents

Abstract 2

Non-technical summary 3

1. Introduction 5

2. Related literature 7

3. Modelling the dynamics of credit risk 8

4. Data 9

4.1. Probabilities of default 9

4.2. Demand and supply shocks 11

4.3. Monetary policy shocks 11

4.4. Macro and financial controls 12

5. Results 13

5.1. The response of credit risk at the euro area level 13

5.2. Exploring firms' heterogeneity 16

6. Conclusion 23

References 25

Appendix 27

Acknowledgements 35

Table 1. Country coverage by firms' size and PD distribution 10

Table 2. Shocks 11

Table 3. Descriptive statistics for the control variables 13

Table 4/Table 3. Firm level IRFs 21

Figure 1. Probability of default of euro area firms 10

Figure 2. Monetary policy shocks 12

Figure 3. Response of PDs to demand and supply shocks 14

Figure 4. Response of PDs to monetary policy shocks 16

Figure 5. Response of PDs to shocks by firm size 18

Figure 6/Figure 7. Response of firms' PDs by sectors to selected shocks 19

Figure 7/Figure 8. The role of leverage and cash holdings 22

Figure 8/Figure 9. The role of leverage in the response of firms' PDs to shocks 23

Table A.1. Share of persons employed by firms' size class 27

Table A.2. Mapping of NACE codes into eight sectors 27

Table A.3. The role of firm characteristics: age 31

Table A.4. The role of firm characteristics: leverage 32

Table A.5. The role of firm characteristics: interest expenses to EBITDA 33

Table A.6. The role of firm characteristics: leverage and cash holdings 34

Figure A.1. Macroeconomic shocks 28

Figure A.2. IRF by sectoral aggregates 29