Market Power and Monetary Policy Transmission

Romain Duval, Davide Furceri, Raphael Lee and Marina Tavares

No 2021/184, IMF Working Papers from International Monetary Fund

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.

Keywords: Monetary policy; interest rates; imperfect competition; market power; markups; monetary policy transmission; monetary policy shock; responses to change; firms' market power; firms' response; Central bank policy rate; Competition; Global (search for similar items in EconPapers)
Pages: 56
Date: 2021-07-09
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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Journal Article: Market power and monetary policy transmission (2024)
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