The Working Capital Channel

The New Keynesian model, augmented with the working capital channel, predicts that a rise in the policy rate causes firms that use more working capital to increase their prices more, and that the pass-through is gradual because of price rigidity. Using a unique dataset on firm-product-level price indices, I show that a one percentage point monetary policy shock leads to a 6 percent increase in the firm’s price and that the pass-through takes about 4 months. The pass-through in the microdata is 6 times larger than it is implemented in the supply-side block of standard New Keynesian DSGE models.