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

Matthias Gnewuch and Donghai Zhang ()

Journal of Monetary Economics, 2025, vol. 149, issue C

Abstract: We document that an interest rate cut reshapes the cross-sectional distribution of investment rates—fewer zero and small investment rates and more large ones—and particularly so among young firms. The extensive margin investment decision—whether to invest or not—is essential in explaining these findings. We develop a heterogeneous-firm model with fixed adjustment costs and firm life-cycle dynamics to rationalize the evidence and study the implications for the investment channel. The extensive margin investment decision makes monetary policy less effective whenever few firms are inclined to invest: in downturns, but also in economies with low business dynamism and few young firms.

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)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:149:y:2025:i:c:s0304393224001740

DOI: 10.1016/j.jmoneco.2024.103721

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