We provide novel evidence on the supply-side transmission of monetary policy through a floating-rate channel. After a rate hike, firms with floating-rate loans may keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy.
- Speaker
- Date
- Monday 16 Jun 2025, 11:30 - 12:30
- Type
- Seminar
- Room
- 2-14
- Building
- Polak Building
Using monthly data on product-level prices, industry-level inflation rates and the euro-area credit register from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50% smaller when firms rely on floating rate loans.
This effect is stronger in concentrated, high mark-up markets, where firms can more easily pass on higher prices to their customers, as well as in markets with highly leveraged or illiquid firms.
Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. Overall, if firms across the euro area had a lower reliance on floating-rate loans, inflation would have been 0.8 percentage points lower in 2022-2023.
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