2023-03-15-ADB-Corporate_Market_Power_and_Monetary_Policy_Transmission_in_Asia_31页_1mb

ADBI Working Paper 1365 Summary

Corporate Market Power and Monetary Policy Transmission in Asia

Introduction

This paper examines the impact of corporate market power on monetary policy transmission in Asia using firm-level data from 11 advanced and emerging Asian economies. The study finds that rising market power significantly dampens the effectiveness of monetary policy transmission. After a monetary policy tightening, firms with low market power (low markups) experience a significant decline in real sales, while firms with high market power (high markups) show little to no response. The findings highlight the importance of competition policy in enhancing the effectiveness of monetary transmission mechanisms.

Methodology

• Data: Firm-level financial data from the ORBIS database, deflated using gross output deflators.
• Markup Estimation: Estimated using production function approaches, with the Lerner index as an alternative measure.
• Monetary Policy Shocks: Identified using structural VAR models orthogonalizing policy rate changes.
• Empirical Framework: Panel local projections were employed to analyze the heterogeneous responses of real sales to monetary policy shocks, grouped by firms' markup levels.

Key Findings

1. Heterogeneous Responses:

   • Firms with low market power (low markups) exhibit strong and persistent declines in real sales after a monetary tightening, while firms with high market power respond minimally.
   • The average effect of monetary policy is driven by low-markup firms.

2. Market Power Dynamics:

   • Rising markups (market power) correlate with reduced effectiveness of monetary transmission.
   • The impact is more pronounced in emerging Asian economies.

3. Robustness Checks:

   • Results hold across various specifications, including alternative monetary policy measures (e.g., long-term rates), markup definitions (Lerner index), and factors like firm size, economic freedom, and industry.

4. Lack of Alternative Explanations:

   • Financial frictions, such as leverage, do not explain the observed heterogeneity. Policy implications suggest the need for balancing innovation incentives with competition policy to maintain an effective monetary transmission mechanism.

Conclusions

• Main Insight: Corporate market power significantly weakens monetary policy transmission in Asia.
• Policy Recommendation: Strengthen competition policy to reduce market power inequality, improving monetary policy effectiveness. Policymakers should coordinate fiscal, industrial, and monetary policies to enhance overall economic stability.

This study underscores the critical role of competition in shaping monetary policy outcomes in emerging economies.