Firm heterogeneity, capital misallocation and optimal monetary policy

Beatriz González, Galo Nuño Barrau, Dominik Thaler and Silvia Albrizio

No 1148, BIS Working Papers from Bank for International Settlements

Abstract: This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism.

Keywords: monetary policy; firm heterogeneity; financial frictions; capital misallocation (search for similar items in EconPapers)
JEL-codes: E12 E22 E43 E52 L11 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Firm heterogeneity, capital misallocation and optimal monetary policy (2024)
Working Paper: Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy (2023)
Working Paper: Firm heterogeneity, capital misallocation and optimal monetary policy (2021)
Working Paper: Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1148

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