The European Central Bank published a working paper finding that financial frictions across production networks materially amplify the effects of monetary policy on euro area prices and output. At their peak, indirect effects transmitted through suppliers and customers are about three times as large in absolute terms as the direct effect of a sector’s own leverage, with network frictions strengthening the contractionary impact of monetary tightening over the medium term. The findings identify opposing supply-chain channels. Financially constrained downstream customers reduce purchases of intermediate inputs after a tightening, reinforcing declines in output and prices. Constrained upstream suppliers instead raise prices to protect margins, partly offsetting disinflation, but the downstream demand channel dominates overall. The analysis combines firm balance-sheet data and sectoral input-output linkages across 20 euro area countries and 64 sectors from 1999 to 2024, indicating that the location of leverage within supply chains can be more informative for assessing monetary transmission than economywide leverage alone.
European Central Bank2026-08-06
European Central Bank publishes research finding network financial frictions amplify monetary policy effects by three times the direct effect
European Central Bank research finds that financial frictions across production networks amplify monetary policy effects, with peak indirect effects about three times the direct effect of a sector’s own leverage. Weaker demand from financially constrained customers dominates price increases by constrained suppliers, strengthening declines in prices and output after monetary tightening.