Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

Cooper Howes

No RWP 21-06, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of U.S. manufacturing firms, I show this increase is driven by the types of firms that are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back.

Keywords: Monetary Policy; Investments; Financial Frictions (search for similar items in EconPapers)
JEL-codes: E22 E32 E52 (search for similar items in EconPapers)
Pages: 65
Date: 2021-08-27
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-fdg, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:93095

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DOI: 10.18651/RWP2021-06

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