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Monetary Policy, Product Market Competition and Growth

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  • Phillipe Aghion
  • Emmanuel Farhi
  • Enisse Kharroubi

Abstract

In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industry-level and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).

Suggested Citation

  • Phillipe Aghion & Emmanuel Farhi & Enisse Kharroubi, 2018. "Monetary Policy, Product Market Competition and Growth," CEP Discussion Papers dp1590, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1590
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    References listed on IDEAS

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    3. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilbert Cette & Laurent Eymard, 2012. "Credit Constraints And The Cyclicality Of R&D Investment: Evidence From France," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1001-1024, October.
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    19. repec:hrv:faseco:30752812 is not listed on IDEAS
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    More about this item

    Keywords

    growth; financial conditions; firm leverage; competition;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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