Monetary policy in the presence of supply constraints: Evidence from German firm-level data

Using unique firm-level survey data from Germany, this paper investigates two measures of supply constraints: a new direct measure that indicates material shortages and capacity utilization, a widely accepted measure of bottlenecks and slack. We document substantial heterogeneity in supply constraints both across and particularly within industries and show that material constraints are not very persistent at the firm-level. We also show that high capacity utilization is not indicative of the presence of material constraints at the firm-level. We then ask how supply constraints propagate monetary policy shocks. We find that material-constrained firms increase prices substantially more often than unconstrained firms in response to expansionary monetary policy shocks, even when capacity utilization is low. Our results therefore suggest that material constraints exert substantial inflationary pressure in times of loose monetary policy.