Financial frictions across the production network and the transmission of monetary policy

Alessandro De Sanctis, Stefan Gebauer, Fédéric Holm-Hadulla and Matteo Sirani

No 3271, Working Paper Series from European Central Bank

Abstract: We show that monetary policy transmission is shaped not only by a sector’s own financial frictions but also by those prevailing in the broader production network. The latter, indirect frictions amplify the output and price effects of monetary policy and empirically dominate the direct ones. The amplification results from a downstream demand channel, as customers respond to tighter policy by purchasing fewer inputs. This is partly offset by an upstream cost channel, reflecting that suppliers raise prices to protect margins when financing costs rise. We inspect the mechanism in a multi-sector general equilibrium model with input-output linkages and working-capital constraints. JEL Classification: C32, C67, E31, E32, E52

Keywords: financial frictions; input-output linkages; monetary policy; production networks (search for similar items in EconPapers)
Date: 2026-08
New Economics Papers: this item is included in nep-fdg and nep-mon
Note: 1624014
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263271

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