Discussion paper

DP18232 Monetary Policy and Market Competition: Is Europe Different?

We study how monetary policy affects market competition in the euro area. Based on a sample of over 1.4 million firms, we show that when monetary conditions ease (tighten), smaller firms' sales and profit margins increase (decline) relative to medium and large firms. The underlying mechanism is an increase (decline) in long-term debt, investment, and employment by small firms following lower policy rates. The effect is stronger in local markets with higher bank competition. Contrasting recent evidence for the US, our results suggest that monetary easing can strengthen market competition and productivity in a bank-based economy, and highlight the role of financial factors in underpinning this relation. We rationalize these findings by theorizing firm-size-dependent access to external debt financing.


Popov, A and L Steininger (2023), ‘DP18232 Monetary Policy and Market Competition: Is Europe Different? ‘, CEPR Discussion Paper No. 18232. CEPR Press, Paris & London. https://cepr.org/publications/dp18232