Finance, Shocks, Competition and Price Setting

Abstract: Essay I: The New Keynesian model augmented with the working capital channel predicts that (i) a rise in the policy rate increases producer prices, with a stronger impact on firms that use more working capital, (ii) the pass-through of policy rate changes to prices is gradual because of price rigidity and (iii) unanticipated policy rate changes have larger effects than anticipated changes. Using firm-level micro data, I test these predictions. I show that a firm with average working capital holdings increases its price by 0.1 percent after 3 months and by 0.2 percent after 6 months following a percentage unit increase in the policy rate.