Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

Cooper Howes

No 1581, 2019 Meeting Papers from Society for Economic Dynamics

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 US manufacturing firms, I show this increase is driven by the types of firms which 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. Counterfactual exercises suggest that aggregate investment should become more strongly countercyclical as fewer sectors face financial constraints.

Date: 2019
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1581

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