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Fragile firms, fierce shocks: The asymmetric firm-level transmission of monetary policy in India

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  • Raghuvanshi, Abhay Pratap
  • Ahmad, Wasim

Abstract

How do firm characteristics shape the real effects of monetary policy in emerging markets, and which firms bear the highest cost of tightening? Using firm-level data for India from 2011 to 2022, this paper examines heterogeneity in monetary transmission, focusing on balance-sheet strength, market power, and ownership. Using a panel local-projection framework, we estimate the dynamic response of firm sales to monetary policy shocks. Tightening shocks lead to larger sales contractions among firms with higher leverage, weaker liquidity and profitability, and smaller asset bases. Policy effects are also asymmetric: financially fragile firms suffer a deeper sales reduction during the expansion phase of the business cycle than during the contraction phase. The findings suggest that monetary transmission in emerging markets operates through a balance-sheet channel, where credit frictions amplify the impact of policy shocks, rendering firm financial resilience crucial to the effectiveness of transmission.

Suggested Citation

  • Raghuvanshi, Abhay Pratap & Ahmad, Wasim, 2026. "Fragile firms, fierce shocks: The asymmetric firm-level transmission of monetary policy in India," Economic Modelling, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:ecmode:v:156:y:2026:i:c:s0264999325004584
    DOI: 10.1016/j.econmod.2025.107463
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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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