Market Power and Monetary Policy Transmission
IMF Working Papers, July 9, 2021
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Bibliographic details
- Authors: Romain A Duval, Davide Furceri, Raphael Lee, Marina Mendes Tavares
- Published: July 9, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513588001.001
Summary and main findings
- Firms’ market power dampens the response of their output to monetary policy shocks.
- 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.
- There is evidence that the role of markup in monetary policy transmission is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints.
- Findings are rationalized through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.
Channels, mechanisms, and analysis
- Market power (measured via markups) operates as a distinct channel that weakens firms’ output responses to monetary policy shocks.
- Interaction with financial constraints: the markup channel is larger for firms with characteristics associated with greater financial constraints (notably smaller and younger firms).
- Theoretical underpinning: a partial equilibrium model with borrowing constraints explains why low-markup firms’ responses to interest rate changes are amplified.
Empirical scope and data
- Firm-level evidence for the United States.
- A large cross-country firm-level dataset for 14 advanced economies.
- Results reported as substantive and broadly consistent across the U.S. and the cross-country sample.
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