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  5. The Transmission of Monetary Policy
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The Transmission of Monetary Policy

Paper Session

Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)

Hilton Riverside, Royal
Hosted By: American Economic Association
  • Chair: Sebnem Kalemli-Ozcan, University of Maryland

Market Power and Monetary Policy Transmission

Marina Mendes Tavares
,
International Monetary Fund
Romain Duval
,
International Monetary Fund
Davide Furceri
,
International Monetary Fund
Raphael Lee
,
France Tresor Agency

Abstract

We show that firms’ market power dampens the response of their output to monetary policy shocks, using
firm-level data for the United States and a large cross-country firm-level dataset for 14 advanced economies. The estimated impact of a firm’s markup on its response to a monetary policy shock is large enough to materially affect monetary policy transmission. We also find some evidence that the role of markup in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints. We rationalize these findings through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.

Product Market Structure and Monetary Policy: Evidence from the Euro Area

Annalisa Ferrando
,
European Central Bank
Peter McAdam
,
European Central Bank
Filippos Petroulakis
,
Bank of Greece
Xavier Vives
,
IESE Business School

Abstract

Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but
its potency can be conditioned by the degree of market competition. We first identify conditions under
which changes in marginal costs may have different effects on credit constraints and output under
different competitive environment, in a simple Cournot competition setting. We then exploit changes
in monetary policy to examine whether the pass-through of borrowing costs is affected by market
structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions
(OMT) program in a triple-differences specification. We show that small firms (which have low market
power and higher credit constraints) in "stressed" countries (which benefited more from the policy)
within less concentrated sectors experienced a larger reduction in credit constraints than similar firms
in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary
policy shocks to study how market structure affects pass-through to real variables, like investment and
sales growth. We find evidence that firms with more market power respond less to monetary policy
shocks. These results show that the interaction of borrowing capacity and market structure matters,
and that concentration may have important effects on monetary policy transmission.

Monetary Policy under Labor Market Power

Anastasia Buya
,
Columbia University
Rui Mano
,
International Monetary Fund
Yannick Timmer
,
Federal Reserve Board
Anke Weber
,
International Monetary Fund

Abstract

Using the near universe of online vacancy postings in the U.S., we study the interaction between labor market power and monetary policy. We show empirically that labor market power amplifies the labor demand effects of monetary policy, while not disproportionately affecting wage growth. A search and matching model in which firms can attract workers by either offering higher wages or posting more vacancies can rationalize these findings. We also find that vacancy postings that do not require a college degree or technology skills are more responsive to monetary policy, especially when firms have labor market power. Our results help explain the ``wageless'' recovery after the 2008 financial crisis and the flattening of the wage Phillips curve, especially for the low-skilled, who saw stagnant wages but a robust decline in unemployment. In the current context of rising interest rates, unemployment is likely to rise more in poorer U.S. regions because labor market power is more prevalent there, thus leading to rising inequality.

Monetary Policy and Firm Dynamics: The Financial Channel

S. Borağan Aruoba
,
University of Maryland
Bernabe Lopez-Martin
,
Central Bank of Chile
Felipe Eduardo Saffie
,
University of Virginia
Will Lu
,
Central Bank of Chile

Abstract

We combine administrative firm-level data, information from credit records, and monetary policy surprises for Chile to estimate the impact of changes in the monetary policy
(MP) interest rate on investment and employment, and document the role of financial
factors in the transmission of monetary policy. We find support for the financial channel of monetary policy, showing that only firms with debt see their investment and
employment affected by changes in MP. We show that firms with high leverage levels
and larger fractions of overdue debt are less sensitive to monetary policy. We document
the role of age and size as additional factors of heterogeneity in the transmission of
monetary policy.

Discussant(s)
Sanjay Singh
,
University of California-Davis
Deniz Igan
,
Bank for International Settlements
Chen Yeh
,
Federal Reserve Bank of Richmond
Matthew Darst
,
Federal Reserve Board
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook