IMF Working Papers

Market Power and Monetary Policy Transmission

By Romain A Duval, Davide Furceri, Raphael Lee, Marina Mendes Tavares

July 9, 2021

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Romain A Duval, Davide Furceri, Raphael Lee, and Marina Mendes Tavares. Market Power and Monetary Policy Transmission, (USA: International Monetary Fund, 2021) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We show that firms’ market power dampens the response of their output to monetary policy shocks, using firm-level data for the United States and a large cross-country firm-level dataset for 14 advanced economies. The estimated impact of a firm’s markup on its response to a monetary policy shock is large enough to materially affect monetary policy transmission. We also find some evidence that the role of markup in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints. We rationalize these findings through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.

Subject: Central bank policy rate, Competition, Cross country analysis, Financial markets, Financial services

Keywords: Central bank policy rate, Competition, Firms' market power, Firms' response, Global, Imperfect competition, Interest rates, Market power, Markups, Monetary policy, Monetary policy shock, Monetary policy transmission, Responses to change

Publication Details

  • Pages:

    56

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2021/184

  • Stock No:

    WPIEA2021184

  • ISBN:

    9781513588001

  • ISSN:

    1018-5941

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