Monetary Policy’s Impact on Firms Facing Supply-Side Inflationary Pressure

Abstract

I use a firm-level text-based measure of supply-side inflationary pressure, developed from firms’ earnings call transcripts, to conduct an event study that shows stocks under inflationary pressure are less responsive to monetary policy shocks, declining less after contractionary shocks and rising less after expansionary shocks. I find similar results using high-frequency market-level data: S&P 500 futures are less sensitive to monetary shocks when supply-driven inflation is high. Using Jordà’s local projections, I find that contractionary monetary policy has a negative effect on the cost of goods sold and a positive effect on the margins, investments, and asset size of firms experiencing larger supply-side inflationary pressure. These findings suggest that the adverse effects of tighter monetary policy are reduced when supply-side inflation is high. They also provide a novel explanation for the monetary policy price puzzle, highlighting that markets may respond less strongly to monetary policy shocks when supply-driven inflation is elevated. Finally, these results indicate a new transmission channel through which monetary policy can influence stock prices. These findings are important for the current policy discussions given the rising trend of supply-side pressures.

Keywords: Monetary policy, Inflation, Price puzzle, Earnings calls

JEL Classification: C55, E31, E44, E52, G14