The Working Capital Channel

Melinda Suveg

No 1482, Working Paper Series from Research Institute of Industrial Economics

Abstract: Firms relying on working capital raise prices following monetary tightening, and this paper demonstrates that the working capital channel plays a key role in partial and general equilibrium inflation dynamics. The working capital channel arises from firms’ need to pre-fund inputs, determined by their exposure (working capital shares) and price elasticity (working capital sensitivity) to interest rate changes. Using detailed firm-product-level price data, the analysis shows that the average firm holds working capital equal to 16% of sales. For a firm with this average share, a one percentage point policy rate hike leads to a 0.48–2.56% price increase over a 3–33 month horizon.

Keywords: Working capital; Price setting; Inflation; Monetary policy; Pass-through (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 L11 (search for similar items in EconPapers)
Pages: 121 pages
Date: 2023-12-15, Revised 2025-10-18
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:1482

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