Unlocking efficiency: optimal monetary policy when capital misallocation matters

Beatriz González, Galo Nuño, Dominik Thaler and Silvia Albrizio

Research Bulletin, 2024, vol. 118

Abstract: Some firms have the capacity to contribute significantly to economic productivity but cannot obtain the necessary capital for investment, which instead flows to less productive firms. While “misallocation of capital” and its detrimental impact on productivity is traditionally beyond the scope of central banks, monetary policy can influence it through firms’ investment decisions. Using a New Keynesian model and granular data on Spanish firms, our results show that expansionary monetary policy reduces capital misallocation. However, in committing to an optimal policy course, central banks are better off sticking to price stability rather than exploiting this channel to influence productivity. JEL Classification: E12, E22, E43, E52, L11

Keywords: capital misallocation; financial frictions; firm heterogeneity; Monetary policy (search for similar items in EconPapers)
Date: 2024-04
Note: 2253012
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