Working Paper: CEPR ID: DP13214
Authors: Philippe 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).
Keywords: No keywords provided
JEL Codes: E32; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary easing induced by the OMT program (E52) | Sectoral and firm-level growth (L25) |
| Unexpected drop in long-term government bond yields (E43) | Growth in more leveraged sectors (O49) |
| Lower product market regulation (L50) | Stronger impact of monetary easing on growth in leveraged sectors (E44) |
| Low product market competition (L13) | Firms less responsive to changes in funding conditions (G21) |
| High indebtedness (F65) | Negative effects on growth (F62) |
| More competitive environments (L19) | Greater responsiveness to monetary easing (E49) |