OeNB Freitagsseminar with Michael Bauer

Prices and Monetary Policy: The Role of Financial Constraints

OeNB Freitagsseminar with with Michael Bauer, Federal Reserve Bank of San Francisco

Abstract
Financial constraints play an important role in the transmission of monetary policy to prices and inflation. Using detailed micro data on Swedish firms and high-frequency monetary policy surprises for the Riksbank, we document that smaller, financially constrained firms change prices significantly less in response to changes in monetary policy than larger firms. This result can be rationalized using theoretical models in which firms face financial constraints and a sticky customer base: Constrained firms maintain cash flows after a monetary contraction by lowering their prices less, resulting in a loss of market share. Additional evidence supports this explanation and the use of size as a proxy for financial constraints. First, smaller, more constrained firms indeed see a more negative sales response to monetary policy changes than other firms. Second, smaller firms have a higher share of debt and adjust their debt significantly more in response to policy changes. Third, the marginal cost of smaller firms is not less responsive to monetary policy, therefore differences in production structures cannot explain the differential price response of small and large firms. Our results suggest that financial constraints significantly impede the monetary transmission to inflation.

Date
Thursday, 9 April 2026 | Start: 11:00 AM | End: 12:30 PM                    

Venue
The event is planned both, online via Webex and onsite at the Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna