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Market Power and Monetary Policy Transmission

Author

Listed:
  • Mr. Romain A Duval
  • Davide Furceri
  • Raphael Lee
  • Ms. Marina Mendes Tavares

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.

Suggested Citation

  • Mr. Romain A Duval & Davide Furceri & Raphael Lee & Ms. Marina Mendes Tavares, 2021. "Market Power and Monetary Policy Transmission," IMF Working Papers 2021/184, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/184
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    Cited by:

    1. Enisse Kharroubi & Renée Spigt & Deniz Igan & Koji Takahashi & Egon Zakrajšek, 2023. "Markups and the asymmetric pass-through of cost push shocks," BIS Working Papers 1150, Bank for International Settlements.
    2. Marcel Takoulac Kamta & Willi Verlaine Dongho Wamba Tejio & Dinah Gembom Phungeh & Gautier Tchoffo Tameko, 2023. "Bank Profitability and Monetary Policy Transmission in Cameroon," Economic Research Guardian, Weissberg Publishing, vol. 13(2), pages 72-81, December.
    3. Viacheslav Kramkov, 2023. "Does CPI disaggregation improve inflation forecast accuracy?," Bank of Russia Working Paper Series wps112, Bank of Russia.
    4. Anastasia Burya & Rui Mano & Mr. Yannick Timmer & Miss Anke Weber, 2022. "Monetary Policy Under Labor Market Power," IMF Working Papers 2022/128, International Monetary Fund.
    5. Rakshit, Bijoy & Bardhan, Samaresh, 2023. "Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India," Journal of Asian Economics, Elsevier, vol. 86(C).
    6. Ferrando, Annalisa & McAdam, Peter & Petroulakis, Filippos & Vives, Xavier, 2021. "Product market structure and monetary policy: evidence from the Euro Area," Working Paper Series 2632, European Central Bank.

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