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The working capital channel

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  • Suveg, Melinda

Abstract

Firms relying on working capital raise prices following monetary tightening, and this paper demonstrates that the working capital channel plays a key role in partial and general equilibrium inflation dynamics. The working capital channel arises from firms’ need to pre-fund inputs, determined by their exposure (working capital shares) and price elasticity (working capital sensitivity) to interest rate changes. Using detailed firm-product-level price data, the analysis shows that the average firm holds working capital equal to 16% of sales. For a firm with this average share, a one percentage point policy rate hike leads to a 0.48–2.56% price increase over a 3–33 month horizon.

Suggested Citation

  • Suveg, Melinda, 2026. "The working capital channel," European Economic Review, Elsevier, vol. 182(C).
    • Handle: RePEc:eee:eecrev:v:182:y:2026:i:c:s0014292125002430
    DOI: 10.1016/j.euroecorev.2025.105193
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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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