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The Working Capital Channel

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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.

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  • Suveg, Melinda, 2023. "The Working Capital Channel," Working Paper Series 1482, Research Institute of Industrial Economics, revised 18 Oct 2025.
    • Handle: RePEc:hhs:iuiwop:1482
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    References listed on IDEAS

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    1. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    2. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
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    Cited by:

    1. Volha Audzei & Jan Bruha & Ivan Sutoris, 2025. "Does Firms' Financing in Foreign Currency Matter for Monetary Policy?," Working Papers 2025/10, Czech National Bank, Research and Statistics Department.
    2. Albertazzi, Ugo & Ferrando, Annalisa & Gori, Sofia & Rariga, Judit, 2025. "The cost channel of monetary policy: evidence from euro area firm-level survey data," Working Paper Series 3097, European Central Bank.

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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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