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Financial frictions across the production network and the transmission of monetary policy

Author

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  • De Sanctis, Alessandro
  • Gebauer, Stefan
  • Holm-Hadulla, Fédéric
  • Sirani, Matteo

Abstract

We show that monetary policy transmission is shaped not only by a sector’s own financial frictions but also by those prevailing in the broader production network. The latter, indirect frictions amplify the output and price effects of monetary policy and empirically dominate the direct ones. The amplification results from a downstream demand channel, as customers respond to tighter policy by purchasing fewer inputs. This is partly offset by an upstream cost channel, reflecting that suppliers raise prices to protect margins when financing costs rise. We inspect the mechanism in a multi-sector general equilibrium model with input-output linkages and working-capital constraints. JEL Classification: C32, C67, E31, E32, E52

Suggested Citation

  • De Sanctis, Alessandro & Gebauer, Stefan & Holm-Hadulla, Fédéric & Sirani, Matteo, 2026. "Financial frictions across the production network and the transmission of monetary policy," Working Paper Series 3271, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263271
    Note: 1624014
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • 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

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