Revisiting the Monetary Transmission Mechanism Through an Industry-Level Differential Approach

By combining industry-level data on output and prices with monetary policy rates for 88 countries, we analyze how the effects of monetary policy vary with industry characteristics. Next to being interesting in their own right, our results are informative on the importance of various transmission mechanisms (as they are expected to vary systematically with the included characteristics). Rather than relying on standard monetary policy shock identification, we address the endogeneity problem via a differential approach (interacting our monetary policy measure with industry-level characteristics). Results suggest that monetary contractions reduce output by more in industries featuring assets more difficult to collateralize (consistent with the balance sheet channel) and in industries more reliant on international trade (consistent with the exchange rate channel). The balance sheet channel becomes stronger during bad times, as predicted by financial accelerator logic. We do not find evidence supporting the interest rate- or cost channel of monetary policy