EUROPEANCENTRALBANK

EUROSYSTEM

FabrizioCore,FilippoDeMarco,TimEisert,

GlennSchepens

WorkingPaperSeries

Inflationandfloating-rateloans:evidencefromtheeuro-area

chaMP

No3064

Disclaimer:ThispapershouldnotbereportedasrepresentingtheviewsoftheEuropeanCentralBank(ECB).TheviewsexpressedarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheECB.

ECBWorkingPaperSeriesNo30641

ChallengesforMonetaryPolicyTransmissioninaChangingWorldNetwork(ChaMP)

Thispapercontainsresearchconductedwithinthenetwork“ChallengesforMonetaryPolicyTransmissioninaChangingWorld

Network”(ChaMP).ItconsistsofeconomistsfromtheEuropeanCentralBank(ECB)andthenationalcentralbanks(NCBs)oftheEuropeanSystemofCentralBanks(ESCB).

ChaMPiscoordinatedbyateamchairedbyPhilippHartmann(ECB),andconsistingofDianaBonfim(BancodePortugal),MargheritaBottero(Bancad’Italia),EmmanuelDhyne(NationaleBankvanBelgi?/BanqueNationaledeBelgique)andMariaT.Valderrama

(OesterreichischeNationalbank),whoaresupportedbyMelinaPapoutsiandGonzaloPaz-Pardo(bothECB),7centralbankadvisersand8academicconsultants.

ChaMPseekstorevisitourknowledgeofmonetarytransmissionchannelsintheeuroareainthecontextofunprecedentedshocks,

multipleongoingstructuralchangesandtheextensionofthemonetarypolicytoolkitoverthelastdecadeandahalfaswellastherecentsteepinflationwaveanditsreversal.Moreinformationisprovidedonits

website.

ECBWorkingPaperSeriesNo30642

Abstract

Weprovidenovelevidenceonthesupply-sidetransmissionofmonetarypolicythroughafloating-ratechannel.Afteraratehike,firmswithfloating-rateloanskeeppriceselevatedtooffsethigherborrowingcosts,therebyreducingtheeffectivenessofmonetarypolicy.Usingmonthlydataonproduct-levelprices,industry-levelinflationratesandtheeuro-areacreditregisterfrom2021to2023,wefindthattheshort-runimpactofmonetarytighteningoninflationis50%smallerwhenfirmsrelyonfloating-rateloans.Thiseffectisstrongerforfirmsthatrelymoreonworkingcapitaltofinanceproductionandwhentheycaneasilypassonhigherpricestotheirstickycustomerbase(customercapital).Sincefirmswithfloating-rateloansfaceanincreaseintheirfinancialburden,theirloantermsaremorefrequentlyrenegotiated,oftenresultinginreducedspreadsandashiftfromfloatingtofixedrates.Overall,iffirmsacrosstheeuroareahadalowerrelianceonfloating-rateloans,inflationwouldhavebeen0.8percentagepointslowerin2022-2023.

Keywords:Monetarypolicytransmission,Inflation,Floating-rateloans,Marketpower,Productprices

JEL:E31,E52,G21

ECBWorkingPaperSeriesNo30643

Non-technicalSummary

Atighteningofmonetarypolicyratesiswidelyacknowledgedasakeytoolagainstinflation.Conventionalmacroeconomicmodelssuggestthatinflationwillslowinresponsetoanincreaseinpolicyratesduetoareductioninaggregatedemandcausedbyhigherborrowingcosts(

BernankeandGertler

,

1989

;

Kashyapetal.

,

1993

).

However,theideathatmonetarypolicycanalsoaffectinflationviathe(firm)supplysideisgenerallyoverlooked(

Drechsleretal.

,

2023

).Allelseequal,anincreaseinborrowingcostswillleadtoareductioninafirm’scashflows,especiallywhenfirmsneedtopre-fundproductionusingworkingcapital.Firmsmayreacttotheincreaseinfundingcostsbyincreasingprices,.Suchareactioncouldweakentheimpactoftraditionaldemand-sidechannelsofmonetarypolicy.

Inthispaper,weprovidenovelmicro-levelevidenceonthesupply-sidetransmissionofmonetarypolicy.Todoso,wecombineproduct-levelpricesandindustry-levelinflationdatawithloan-levelcreditregisterinformationforeuro-areacorporations.Notably,weexploitthefactthathavingafloating-rateloanimpliesadirectandimmediateimpactofapolicytighteningonfirms’fundingcosts.Incontrast,thepass-throughofmonetarypolicyratesonborrowingcostsislimitedinthepresenceofdebtcontractsthatarerigidorfixedinnominalterms,suchasfixed-rateloans.

Ourmainfindingisthatfirmswithfloating-rateloanskeeppriceselevatedafteraratehikeinordertooffsetthenegativeimpactofhigherborrowingcosts.Ourindustry-leveldatarevealthattheshort-termreductionininflationduringthe2022-2023monetary-policytighteningintheeuroareais50%smallerinindustry-countrypairs(“markets”)dominatedbyfloating-rateloans.

Thisfindingisconfirmedinthemoregranularproduct-levelpricesdataset.A1percent-agepointincreaseintheECBpolicyratereducesproduct-pricegrowthby0.51percentagepointsforproductssoldbyfirmsfullyreliantonfixed-rateloans(“fixed-ratefirms”hence-forth).Incontrast,thesameincreaseinthepolicyratereducesproduct-pricegrowthonly

ECBWorkingPaperSeriesNo30644

by0.23percentagepointsforproductssoldbyfirmsfullyreliantonfloating-rateloans(“floating-ratefirms”henceforth).

Wealsoinvestigatehowtheimpactofmonetarypolicyoninflationviafloating-rateloansvariesbycharacteristicsofthemarket.Weproposetwomainchannels.Thefirstisaboutworkingcapital:iffirmsrelyoncredittofinanceproductionandhavetopayforinputofproduction(e.g.,materialsandlabor)upfront,theirproductionisaffectedbychangesinthemonetarypolicyrates.Accordingly,wefindastrongerimpactoffloating-rateloansoninflationinmarketscharacterizedbyfirmswithhighworkingcapital,definedastheratioofthestockofinventoriesplustradereceivablesoverassets.Thesecondchannelweproposehastodowithcustomercapital(

ChevalierandScharfstein

,

1996

).Customercapitalisanassetthatgivesfirmsmarketpoweroverastickycustomerbase.Whenthesefirmsareconstrained,theychoosetochargehighmarkupsanddepletetheircustomercapital,sacrificingfuturemarketsharesandlong-termprofitabilityinordertoboostcurrentcash-flow(

Gilchristetal.

,

2017

).Accordingly,wefindthattheimpactoffloating-rateloansoninflationispresentonlyinmoreconcentratedmarkets(i.e.,higherHHIbasedonsales’shares)wherefirmspresumablyhavehighercustomercapital.

Theroleofloaninterestrateresetsiscurrentlymissingindiscussionsonmonetarypolicy,yetourfindingssuggestitisacrucialconsiderationforcentralbankersaimingtocontrolinflation.Ourfindingsimplythatthepresenceoffloating-ratecorporateloanscanweakenthetransmissionofmonetarypolicy.Iffirmswithfloating-rateloanskeeppriceselevatedinresponsetoaninterestratehike,thissupply-sidereactioncounteractsthedemand-sideeffectofmonetarypolicy.

ECBWorkingPaperSeriesNo30645

1Introduction

Atighteningofmonetarypolicyratesiswidelyacknowledgedasakeytoolagainstinflation.Conventionalmacroeconomicmodelssuggestthatinflationwillslowinresponsetoanincreaseinpolicyratesduetoareductioninaggregatedemandcausedbyhigherborrowingcosts(

BernankeandGertler

,

1989

;

Kashyapetal.

,

1993

).Forexample,householdswithmortgagessignificantlyadjustconsumptioninresponsetointerestratechanges(

DiMaggio

etal.

,

2017

;

Cloyneetal.

,

2020

).Inaddition,increasinginterestratescanalsoinfluencetheavailabilityofcredit,especiallywhenborrowingrestrictionslimithouseholddebt-to-income(DTI)ratio(

Greenwald

,

2018

;

Bosshardtetal.

,

2024

).Allthesechannelsleadtoareductionin(household)aggregatedemandwheninterestratesrise.

However,theideathatmonetarypolicycanalsoaffectinflationviathe(firm)supplysideisgenerallyoverlooked(

Drechsleretal.

,

2023

).

1

Howdoesthistransmissionwork?Allelseequal,anincreaseinborrowingcostswillleadtoareductioninafirm’scashflows.Firmsmayreacttotheincreaseinfundingcostsbyincreasingprices,sacrificingfuturemarketsharesinordertoboostcurrentcashflows(

Gilchristetal.

,

2017

).Suchareactioncouldweakentheimpactoftraditionaldemand-sidechannelsofmonetarypolicyandmakesanincreaseininterestratessimilartoafinancially-inducedcostshock.Thisviewisnotnew,andwaspartofthepolicydebateduringtheinflationspikesin1970-80s:U.S.CongressmanPatmanarguedin1970thatraisingratestofightinflationwaslike“throwinggasolineonfire”andinthe1980sBritishbusinessmen“regardinterestrateasacostandlooktoestablishapriceriseinresponsetoincreasedinterestrates”.

2

Inthispaper,weprovidenovelmicro-levelevidenceonthesupply-sidetransmissionofmonetarypolicy.Todoso,wecombineproduct-levelpricesandindustry-levelinflationdatawithloan-levelcreditregisterinformationforeuro-areacorporations.Notably,we

1Anotableexceptioninthisrespectis

BarthandRamey

(

2002

),whoproposea“costchannel”ofmonetarypolicy.Accordingtothischannel,sincemarginalcostsdependontherealinterestrate(

Beaudryetal.

,

2024

),aratehikeraisesthecostofworkingcapital,reducingproductionanddrivingupprices.

2See

GaiottiandSecchi

(

2006

)and

Goodhart

(

1986

).

ECBWorkingPaperSeriesNo30646

exploitthefactthathavingafloating-rateloanimpliesadirectandimmediateimpactofapolicytighteningonfirms’fundingcostsandcashflows(

Gürkaynaketal.

,

2022

).Incontrast,thepass-throughofmonetarypolicyratesonborrowingcostsislimitedinthepresenceofdebtcontractsthatarerigidorfixedinnominalterms,suchasfixed-rateloans.

Ourmainfindingisthatfirmswithfloating-rateloanskeeppriceselevatedafteraratehikeinordertooffsetthenegativeimpactofhigherborrowingcosts.Ourindustry-leveldatarevealthattheshort-termreductionininflationduringthe2022-2023monetary-policytighteningintheeuroareais50%smallerinindustry-countrypairs(“markets”)dominatedbyfloating-rateloans.

3

Theinflationaryconsequencesofthismechanismaresubstantial.IffirmsacrosstheeuroareahadborrowedatthesameshareoffloatingrateloansasfirmsinGermany,France,andBelgium(thecountrieswiththelowestrelianceonfloatingrateloans),inflationwouldhavebeen,onaverage,0.8pploweraftertheECBstartedhikinginterestratesin2022.Thisfindingisalsoconfirmedinthemoregranularproduct-levelpricesdataset.AonepercentagepointincreaseintheECBpolicyratereducesproduct-pricegrowthby0.51percentagepointsforproductssoldbyfirmsfullyreliantonfixed-rateloans(“fixed-ratefirms”henceforth).Incontrast,thesameincreaseinthepolicyratereducesproduct-pricegrowthonlyby0.23percentagepointsforproductssoldbyfirmsfullyreliantonfloating-rateloans(“floating-ratefirms”henceforth).

Thesefindingsimplythatthepresenceoffloating-ratecorporateloanscanweakenthetransmissionofmonetarypolicy.Iffirmswithfloating-rateloanskeeppriceselevatedinresponsetoaninterestratehike,thissupply-sidereactioncounteractsthedemand-sideeffectofmonetarypolicy.Thiscontrastswithfindingsfromthemortgageliterature(

DiMaggioetal.

,

2017

;

Flodénetal.

,

2020

),wherefloating-rateloansenhancemonetarypolicytransmission.Inthatcasetheadjustmentoccursonthedemandside,ashouseholdsreduceconsumptioninresponsetohigherborrowingcosts.Finally,unlikebanklendingchannels(e.g.,

KashyapandStein

,

2000

;

Jiménezetal.

,

2012

),ourproposed“floating-rate

3Wedefinesuchmarketsasthoseinwhichtheshareoffloating-rateloansis90%,thusrepresentingthetopquintile,comparedtomarketswherefixed-rateloansaremorecommon(30%share,inthebottomquintile).

ECBWorkingPaperSeriesNo30647

channel”worksviaexistingloansandnotviachangesinthecreditsupplyofnewloans.

Studyingthedifferentmarginsofmonetarypolicytransmissionbetweenfloating-andfixed-rateloansistypicallydifficultduetodatalimitations,particularlywhenfocusingonUSfirms.Infact,bankdebtofUSfirmsisprimarilyfloating-rate(

Vickery

,

2008

;

Ippolito

etal.

,

2018

).Toaddressthisissue,weleverageoncomprehensivedatafromAnaCredit,acreditregisterthatcontainsdetailedinformationonindividualbankloansintheeuroarea.WemergeAnaCreditwithbothmarket-levelinflationratesandproduct-levelpricedata.Forourmarket-levelanalysis,weaggregateloan-leveldatatothe2-digit(NACE)industry-countrylevel(“market”level)andmatchitwithdataonmonthlygrowthintheCPIacrossthesemarkets,following

Acharyaetal.

(

2024

).Thefinaldatasetweconstructcontains13,944industry-country(i.e,market)monthlyobservationsfrom16euro-areacountriesand43industries(encompassing63two-digitNACEindustries)fromJuly2021toJuly

2023.Ourproduct-levelanalysisreliesonproduct-levelIRiscannerdataforsupermarketsinFrance,GermanyandItaly.Thefinalsampleconsistsof274,335products,belongingto3,845differentproducttypesandproducedby10,498firms.

OurempiricalstrategyreliesonaDifference-in-differences(DiD)methodology,whereweregresspricechangesontheinteractionbetweenchangesintheECBpolicyrate(i.e.,theDepositFacilityRate,DFR)andtheex-anteexposuretofloating-rateloansatthefirm-ormarket-level.

4

Ourmainidentificationassumptionisthatofparalleltrends.Forourmarket-levelanalysis,thisimpliesthattheinflationrateinfixed-ratemarketsprovidesagoodcounterfactualfortheinflationrateoffloating-ratemarketsintheabsenceofchangesinthepolicyrate.Similarly,forourproduct-levelanalysisweneedthepriceevolutionoffixed-ratefirmstobesimilartothatoffloating-ratefirmsbeforetheratehike.AdynamicDiDsetupindeedconfirmsthatthisisthecaseduringthepre-period,bothatthemarketandattheproductlevel.

Apotentialconcerninouranalysispertainstheself-selectionoffirmsintofloatingor 4Inrobustness,wealsoemployidentifiedmonetarypolicysurprisesusinghigh-frequencychangesin1-monthOvernight-IndexSwap(OIS)aroundECBdecisionsandpressconferences(

Altavillaetal.

,

2019

).

ECBWorkingPaperSeriesNo30648

fixed-ratecredit.Aswemeasuretheexposuretofloating-rateloansasofthefirsthalfof2021,theidentificationassumptionisthatasofearly2021,firmswerenotanticipatingsignificantrisesininterestrates,andthuscouldnotselectintofloatingorfixedrateloansbecauseoftheseexpectations.Atthattime,theprolongedperiodofnegativeinterestratesandthelowaggregatedemandfollowingCovid-19hadkeptinflationconcernslowintheeuroarea.Analysts’forecastsfromtheECBSurveyofMonetaryAnalysts(SMA)showthatmarketparticipantswerenotexpectingincreaseintheDFRuntilMarch2022andeventhen,underestimatedthespeedoftheratehikes(Figure

A1

intheOnlineAppendix).Itisthenunlikelythatcorporationsexpectedtheratehikestohappen.Inthisregard,wealsofindthatfloating-ratefirmsaremorelikelytoswitchtofixed-rateloansafterratehikes,suggestingthattheycouldnotadjustbeforetheratehikehit.

Anotherempiricalchallengewefaceisthepossibilitythatmonetarypolicydifferentiallyaffectsothermarket-levelfactorsthatalsodriveinflation.Forexample,ifthepolicyrateaffectsdemandinfloatingvs.fixedratemarketsdifferently,thiscouldleadtobiasedestimates.Thegranularityofthedataallowustoaddressthisconcern.Inthemarket-levelanalysis,weenrichtheDiDspecificationwithcountry-monthandindustry-monthfixedeffects,absorbinganyindustry-andcountrytime-varyingdemandshocks.Atthefirm-product-level,weemployaneventighterspecification,wherewecompareproductssoldwithinthesameproductcategoryinacountrybydifferentfirms.Forexample,wecomparethepriceoflow-fatyogurtproducedbyafloating-ratefirmtothatoflow-fatyogurtproducedbyafixedratefirminthesamemonth.Doingsoeffectivelyabsorbsproduct-specificdemandinacountry.

Next,weinvestigatehowtheimpactofmonetarypolicyoninflationviafloating-rateloansvariesbycharacteristicsofthemarket.Weproposetwomainchannels.Thefirstisaboutworkingcapital:iffirmsrelyoncredittofinanceproductionandhavetopayforinputofproduction(e.g.,materialsandlabor)upfront,theirproductionisaffectedbychangesin

ECBWorkingPaperSeriesNo30649

themonetarypolicyrates.

5

Accordingly,wefindastrongerimpactoffloating-rateloansoninflationinmarketscharacterizedbyfirmswithhighworkingcapital,definedastheratioofthestockofinventoriesplustradereceivablesoverassets.Thesecondchannelweproposehastodowithcustomercapital(

ChevalierandScharfstein

,

1996

).Customercapitalisanassetthatgivesfirmsmarketpoweroverastickycustomerbase.Whenthesefirmsareconstrained,theychoosetochargehighmarkupsanddepletetheircustomercapital,sacrificingfuturemarketsharesandlong-termprofitabilityinordertoboostcurrentcash-flow(

Gilchristetal.

,

2017

).Accordingly,wefindthattheimpactoffloating-rateloansoninflationispresentonlyinmoreconcentratedmarkets(i.e.,higherHHIbasedonsales’shares)wherefirmspresumablyhavehighercustomercapital.Intuitively,afloating-ratefirminacompetitivemarketcannotaffordtoincreaseprices,asithasnocustomerbase,anditisunabletogenerateshort-termcashflow.

6

Themechanismofourfloating-ratechannelofmonetarypolicyworksthroughanincreaseinfirms’costoffunding.Theloan-leveldatafromAnaCreditenableustoshowthatinterestratesatthefirm-banklevelincreasemarkedlyfollowingtheincreaseinmonetarypolicyrateswhenfirmshavefloating-rateloans.Specifically,wefindthatfora100basispoints(bps)increaseinthemonetarypolicyrate,loaninterestratesincreaseby70bpsforfloating-ratefirmsandby9bpsonlyforfixed-ratefirms.

7

AdynamicspecificationshowsthatinterestrateswereidenticalacrossthetwogroupsofloansbeforetheratehikeandwidenonlyaftertheratehikeinAugust2022.Attheendofthehikingcycle,asthepolicyratereached4%,thedifferencebetweenfloatingandfixed-rateloansreached2%,inlinewithanaggregatepass-throughelasticityofabout0.5.Thisconfirmsthepresenceofanimmediateandlargeincreaseinfundingcostsforfirmswithfloatingrateloansafterratehikes,evenwhenwecontrolforsupply-sidefactorsthroughbank-timefixedeffects.

5

Christianoetal.

(

1997

)explicitlymodelthisbyincludingtherealinterestrateasanadditionalcostinfirms’labordemand.

6Thismakestheresultdifferentfromthecaseofstandardcostshocks,wherebyfirmswithmoremarketpowerhavealowercostpass-through(

Amitietal.

,

2019

;

WangandWerning

,

2022

).

7Thesmalleffectforfixed-rateloanssuggeststhattheadjustmenttomonetarypolicyratesisgradual,occurringonlywhenfirmssecurenewfixed-rateloansastheexistingonesmature.

ECBWorkingPaperSeriesNo306410

Becausefloating-ratefirmsfacehigherinterestpayments,theyarealsomorelikelytorenegotiateloantermsaftertheratehike.

8

Specifically,wefindthatafirmfullyreliantonfloating-rateloansinaparticularbankrelationshipis50%morelikelytorenegotiateitsloantermsoneyearafterthefirstratehikecomparedtoafirmwithfixed-rateloans.Additionally,weanalyzewhichloantermsareadjustedintherenegotiationaftertheratehike.Weobservethatfirmswithfloating-rateloanstendtosecurelowerspreadsontheseloansandaremorelikelytoconverttofixed-rateterms,withnosignificantchangesinloanmaturityorvolume.Finally,whilefloating-ratefirmsexperienceasignificantriseinmark-ups,theirprofitabilityremainsunchanged,ashigherinterestpaymentsabsorbtheadditionalcashflowfromincreasedsalesrevenue.Thesefindingssupportthehypothesisthatfloating-ratefirmsfaceanotablyhigherfinancialburdenduetoincreasedinterestpayments,promptingadjustmentsintheirfinancingstrategies.

Wecontributetoseveralstrandsoftheliterature.Inmacroeconomics,thereisa“pricepuzzle”ofmonetarypolicy,namelythefactthatpricesincreaseratherthandecreaseafteramonetarytightening(

Sims

,

1992

),atleastintheshort-run.Toexplainthepuzzle,

Barthand

Ramey

(

2002

)proposedtheexistenceofacostchannelofmonetarypolicy.Whenfirmsneedtoborrowtofinancetheirworkingcapital,anincreaseinborrowingcostsimpactstheirmarginalcostsandhencemayleadfirmswithpricingpowertoincreaseprices.ExistingevidenceinfavorofthischannelismostlybasedonaggregateVAR(

Christianoetal.

,

1997

;

RavennaandWalsh

,

2006

).Weprovidethefirstevidenceonthecostchannelusingmicro-datainawell-identifiedsetting.

9

Theexaminationofhowfirms’ownexpectationsandpricingstrategiesreacttomone-tarypolicytighteninginthepresenceoffinancialconstraintsisanimportantcomponentofoverallinflationdynamics(

Gilchristetal.

,

2017

;

Coibionetal.

,

2020

).Recentstudieshaveexploredtheinflationaryeffectsofcreditcrunches,yieldingmixedresults.Ontheone

8Thedatadonotindicatewhethertheborrowerorthebankinitiatesrenegotiation,buttheydoshowwhichloansarerenegotiatedandwhattermschange.

9EarlierevidenceonthecostchannelusinganItalianfirm-levelsurveyisfoundin

GaiottiandSecchi

(

2006

).

ECBWorkingPaperSeriesNo306411

hand,

Kim

(

2020

)and

Lenzuetal.

(

2023

)findthatfirmsintheUSandBelgium,respectively,lowerpricesinresponsetoacreditcontraction.Thesefirmsusepricereductionsasameansofinternalfinancing,liquidatinginventorytoincreasecashreserveswhileavoidingcutsinotherexpenditures.Ontheotherhand,

Drechsleretal.

(

2023

)showthatmonetarypolicytighteningunderRegulationQtriggeredcreditcrunchesthatpromptedfirmstoraiseprices,particularlythosereliantonexternalfinancetocoverproductioncostswhenfinancialconstraintsbecamebinding.

10

Ourfindingsalignwiththoseof

Drechsleretal.

(

2023

),thoughourfocusdiffers:insteadofexamininganegativesupplyshock,weshowthatwhencorporateloanratesarefloating,firmsmayraisepricestopreservecashflowsduringatighteningcycle.Consistentwith

Drechsleretal.

(

2023

),wealsofindthatfirmswithhigherleverage,andhencemoredependentonexternalfinance,aremorelikelytoincreasepricesinresponsetomonetarytightening.

Extensiveresearchhasanalyzedthechoicebetweenfixedorfloating-ratehouseholdmortgagesandhowthisimpactsthetransmissionofmonetarypolicy(

Campbelland

Cocco

,

2003

;

DiMaggioetal.

,

2017

;

Garrigaetal.

,

2017

;

Cloyneetal.

,

2020

;

Flodénetal.

,

2020

).Inthecaseofhouseholdmortgages,floating-ratecreditenhancesmonetarypolicytransmissionastheadjustmentoccursonthedemandside.Relativelylessattentionhasbeendevotedtounderstandinghowinterestratesettingincorporateloanscanaffectthepass-throughofmonetarypolicy.Studiesfocusingontheimpactofcorporatefloating-rateloans(

Ippolitoetal.

,

2018

),especiallythosematuring(

Gürkaynaketal.

,

2022

),analyzethestockpriceandinvestmentreactiontomonetarypolicychanges,notfirms’pricesettingandinflation.Thisissurprisingasfirms’pricingdecisionsarefirst-ordertounderstandoverallinflationandinlightofthelargeliteraturestudyingtheeffectsofmonetarypolicyoncorporateinvestment(

GertlerandGilchrist

,

1994

;

OttonelloandWinberry

,

2020

).

Themechanismofourfloating-ratechannelisdistinctfromthemechanismsatworkin

10

RenkinandZullig

(

2024

)findthatcreditsupplyshocksleadtohigherpricesforDanishfirms,buttheeffectdependsontheelasticityofmarketdemandindifferentsectors,potentiallyreconcilingthetwosetsofresults.Firmsinhigh-elasticitysectorsdecreasepricesfollowinganegativecreditshock.

ECBWorkingPaperSeriesNo306412

thebanklendingchannelandfirmbalancesheetchannel.Accordingtothebanklendingchannel,monetar