Market Power and Monetary Policy Transmission

Author/Editor:

Romain A Duval ; Davide Furceri ; Raphael Lee ; Marina M. Tavares

Publication Date:

July 9, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 2021/184

Frequency:

regular

English

Publication Date:

July 9, 2021

ISBN/ISSN:

9781513588001/1018-5941

Stock No:

WPIEA2021184

Pages:

56

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