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Inventories matter for the transmission of monetary policy: uncovering the cost-of-carry channel

Author

Listed:
  • Diego Rodrigues

    (Université du Québec à Montréal (UQAM))

  • Tim Willems

    (Bank of England and Centre for Macroeconomics)

Abstract

By setting interest rates, monetary policy affects the cost of carrying inventories – giving rise to a ‘cost-of-carry channel’ of monetary policy transmission. Via a simple model, we show that higher inventory carrying costs drive firms, especially those holding larger inventories, to cut their prices. We test this hypothesis using data from the US goods, housing, and oil markets – finding robust evidence supporting the cost-of-carry channel. We then introduce this channel into a New Keynesian setup and show that it makes optimal policy more focused on inflation stabilisation when inventories are more plentiful – the reason being that the central bank faces a more favourable sacrifice ratio in such an environment.

Suggested Citation

  • Diego Rodrigues & Tim Willems, 2025. "Inventories matter for the transmission of monetary policy: uncovering the cost-of-carry channel," Bank of England Staff Working Paper series 1153, Bank of England.
    • Handle: RePEc:boe:boeewp:023275
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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