Inflation and Floating-Rate Loans: Evidence from the Euro-Area

Fabrizio Core, Filippo De Marco, Tim Eisert and Glenn Schepens

No 20354, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We provide novel evidence on the supply-side transmission of monetary policy through a floating-rate channel. After a rate hike, firms with floating-rate loans keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy. Using monthly data on product-level prices, industry-level inflation rates and the euro-area credit register from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50% smaller when firms rely on floating-rate loans. This effect is stronger for firms that rely more on working capital to finance production and when they can easily pass on higher prices to their sticky customer base (customer capital). Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. Overall, if firms across the euro area had a lower reliance on floating-rate loans, inflation would have been 0.8 percentage points lower in 2022-2023.

Keywords: Monetary policy transmission; Inflation; Product prices (search for similar items in EconPapers)
JEL-codes: E31 E52 G21 (search for similar items in EconPapers)
Date: 2025-06
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