Working Paper: CEPR ID: DP18232
Authors: Alexander Popov; Lea Steininger
Abstract: We study how monetary policy affects market competition in the euro area. Based on a sample of over 1.4 million firms, we show that when monetary conditions ease (tighten), smaller firms' sales and profit margins increase (decline) relative to medium and large firms. The underlying mechanism is an increase (decline) in long-term debt, investment, and employment by small firms following lower policy rates. The effect is stronger in local markets with higher bank competition. Contrasting recent evidence for the US, our results suggest that monetary easing can strengthen market competition and productivity in a bank-based economy, and highlight the role of financial factors in underpinning this relation. We rationalize these findings by theorizing firm-size-dependent access to external debt financing.
Keywords: Eurozone; Monetary Policy; Low Interest Rates; Firm Growth and Investment; Market Competition
JEL Codes: E2; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Accommodative monetary policy (E52) | Higher market competition (L13) |
| Accommodative monetary policy (E52) | Increased sales growth of small firms (L25) |
| Increased sales growth of small firms (L25) | Higher market competition (L13) |
| Accommodative monetary policy (E52) | Increase in long-term debt, investment, and employment among small firms (D25) |
| Increase in long-term debt, investment, and employment among small firms (D25) | Increased sales growth of small firms (L25) |
| Higher bank competition (G21) | Stronger effect of monetary easing on sales growth (E60) |