Working Paper: CEPR ID: DP16465
Authors: Frederic Boissay; Emilia Garcia-Appendini; Steven Ongena
Abstract: Is monetary policy transmitted through markets for intermediate goods? Analyzing unique US data on corporate linkages, we document that the financial health of downstream and upstream firms plays a key role in the transmission of monetary policy. Our estimates suggest that conventional contractionary changes in monetary conditions lead to reductions in both the demand and the supply of financially constrained firms downstream and upstream. These reductions create bottlenecks inducing the linked firms "in the middle" to curtail their own activities. Overall these "bottleneck effects" coming from the changes in demand and supply at financially constrained business partners are estimated to have a larger impact on a firm's operations than the firm's own financial conditions.
Keywords: monetary policy; transmission; supply chain; aggregate demand; cost channel
JEL Codes: E52; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary changes in monetary conditions (E49) | Reductions in demand for financially constrained firms (D22) |
| Contractionary changes in monetary conditions (E49) | Reductions in supply for financially constrained firms (D22) |
| Financial health of downstream firms (G32) | Firm sales (L21) |
| Financial health of upstream firms (G32) | Firm input purchases (D22) |
| Tightening of monetary conditions (E52) | Lower sales and purchase growth rate (L81) |
| Trade credit (F19) | Bottleneck effects (J11) |
| Financial health of firms (G32) | Impact of monetary conditions on operations (E52) |
| Monetary policy changes (E52) | Supply chain bottlenecks (L91) |