Monetary policy transmission under supply chain pressure

This study examines how global supply chain conditions influence the transmission of US monetary policy during the pre-pandemic period. We find that elevated supply chain pressures amplify the standard effects of monetary policy shocks on macroeconomic outcomes. For instance, peak effects on output and prices are 160 and 30 percent larger, respectively, when supply chains are stressed. This amplification arises from an intensification of the credit channel, as financial variables related to the cost of external finance become more sensitive to monetary policy under heightened supply chain pressures. For example, the peak response of the excess bond premium doubles in magnitude. Firm-level estimates further support this conclusion, with investment becoming three times more responsive to monetary policy shocks when supply chains are strained. When extending the sample beyond March 2020, the amplification effect becomes larger and occurs at longer lag lengths.