Inventories matter for the transmission of monetary policy: uncovering the cost-of-carry channel

Diego de Sousa Rodrigues and Tim Willems
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Tim Willems: Bank of England and Centre for Macroeconomics

No 1153, Bank of England Staff Working Paper series from Bank of England

Abstract: By setting interest rates, monetary policy affects the cost of carrying inventories – giving rise to a ‘cost-of-carry channel’ of monetary policy transmission. Via a simple model, we show that higher inventory carrying costs drive firms, especially those holding larger inventories, to cut their prices. We test this hypothesis using data from the US goods, housing, and oil markets – finding robust evidence supporting the cost-of-carry channel. We then introduce this channel into a New Keynesian setup and show that it makes optimal policy more focused on inflation stabilisation when inventories are more plentiful – the reason being that the central bank faces a more favourable sacrifice ratio in such an environment.

Keywords: Inventories; monetary policy; monetary transmission mechanism; inflation. (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 52
Date: 2025-11-14
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023275

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