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Market Power and Monetary Policy Transmission
Author:
Mr. Romain A Duval
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https://orcid.org/0000-0002-2775-7172
,
Davide Furcerinull

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,
Raphael Lee
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, and
Marina M. Tavares
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Series:
IMF Working Papers
Volume/Issue:
Volume 2021: Issue 184
Language:
English
Publication Date:
09 Jul 2021
DOI:
https://doi.org/10.5089/9781513588001.001
ISBN:
9781513588001
ISSN:
1018-5941
Pages:
56
Keywords:
Monetary policy; interest rates; imperfect competition; market power; markups; monetary policy transmission; monetary policy shock; responses to change; firms' market power; firms' response; Central bank policy rate; Competition; Global
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2021: Issue 184