The scars of supply shocks: Implications for monetary policy

Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-Level Data

“…But we can interpret our results in light of recent contributions that argue that optimal monetary policy response to an adverse supply shock should be less contractionary than previously thought or should even be expansionary (e.g. Caballero and Simsek (2023) or Fornaro and Wolf (2023)). These contributions trade off the costs of loose monetary policy, i.e., the cost of "running the economy hot" against scarring effects of contractionary monetary policy.…”

“…They complement existing aggregate evidence on this link (e.g., Laumer and Schaffer (2022)). This can inform theoretical studies that discuss optimal monetary policy in the presence of supply constraints and shocks such as Caballero and Simsek (2023), Fornaro and Wolf (2023), or La'O and Tahbaz-Salehi (2022). Our results can also be compared to the growing literature that studies how production networks propagate monetary policy shocks.…”

“…Consequently, there is a renewed and growing interest in how supply constraints propagate economic shocks in general and monetary policy shocks in particular. While recent theoretical contributions study the optimal response of monetary policy in the presence of supply constraints (see, for example, La'O and Tahbaz-Salehi (2022), Caballero and Simsek (2023), or Fornaro and Wolf (2023)), empirical evidence on this transmission channel is still scarce. In this paper, we explore survey data from Germany which contain different measures of supply constraints at the firm-level to study price and production adjustments of firms in the presence of supply constraints in response to monetary policy shocks.…”

Distribution of Market Power, Endogenous Growth, and Monetary Policy

“…See Cerra and Saxena (2008); Jordà, Singh and Taylor (2021) for evidence on persistent effects of temporary shocks or Jordà, Schularick and Taylor (2013) for evidence on deep and protracted recovery/non-recovery from financial crises relative to normal recessions for advanced economies. For additional references, see, for example, Acharya, Bengui, Dogra and Wee (2022); Annicchiarico and Pelloni (2016); Ates and Saffie (2021); Cloyne, Martinez, Mumtaz and Surico (2022); Fatás and Mihov (2013); Fatás and Singh (2024); Fornaro and Wolf (2023) ;Furlanetto, Lepetit, Robstad, Rubio Ramírez and Ulvedal (2023); Guerron-Quintana and Jinnai (2019); Queralto (2020Queralto ( , 2022; Vinci and Licandro (2021).…”

Re-Examining Working Capital Management and Firm Performance Nexus: Does Investment Policy Matter?

“…Every firm must make effective IP decisions in order to manage its WCM, which could have effects on its profitability. Recently, global supply chain disruptions, contractionary monetary and fiscal policies, price hikes, and exchange rate instability caused severe financial crises, resulting in reduced availability of loanable funds in the financial market (Alessandria et al, 2023;Ferreira et al,2021;Fornaro and Wolf, 2023;Sajid et al, 2023). Furthermore, the International Monetary Fund predicted an economic slowdown, especially for developing countries, for the next five years (Eicher & Kawai, 2023).…”