Monetary policy, firm heterogeneity, and the distribution of investment rates

Matthias Gnewuch

Working Papers from European Stability Mechanism

Abstract: We document that an interest rate cut reshapes the distribution of investment rates. Specifically, expansionary monetary policy leads to fewer small and zero investment rates and more large investment rates. This change in the shape of the investment rate distribution is particularly pronounced among young firms. We emphasise the relevance of the extensive margin investment decision—whether to invest or not—in explaining these findings. A decomposition reveals that the extensive margin contributes around 50% to monetary policy’s effect on the average investment rate and over 50% to the heterogeneous effect on young firms. To rationalise these findings and study their aggregate implications, we develop a heterogeneous-firm model with fixed adjustment costs and firm life cycle dynamics.

Keywords: Investment Rate Distribution; Adjustment Costs; Lumpy Investment; Heterogeneous Sensitivity; Extensive Margin; Monetary Policy (search for similar items in EconPapers)
JEL-codes: D21 D22 E22 E52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-05-21
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Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:61

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