Fabrizio Core (LUISS University)

Inflation and floating-rate loans: Evidence from the euro-area

Joint with ESCP Business School

Venue: ESCP Business School – Turin Campus, Via Andrea Doria, 27

Abstract: We provide novel evidence on how monetary policy affects inflation through the floating rate channel. Using euro-area corporate loan data from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50% smaller in markets dominated by floating-rate loans. Firms with floating-rate loans keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy tightening. This effect is stronger in concentrated, high mark-up markets, where firms can more easily pass on higher prices to their customers, as well as in markets with highly leveraged or illiquid firms. Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. The varying prevalence of floating-rate loans helps explain the heterogeneity in monetary policy transmission within the euro-area, as floating rate contracts are more prevalent in peripheral countries, whereas fixed rates contracts are more common in core countries.