Monetary policy, productivity, and market concentration

Andrea Colciago and Riccardo Silvestrini ()

European Economic Review, 2022, vol. 142, issue C

Abstract: We identify a new channel through which monetary policy affects productivity at business cycle frequencies. An unexpected monetary easing initially reduces average labor productivity, which then overshoots its pre-shock level. At the same time, the firm entry rate rises in response to the shock and then undershoots. Market concentration matters for the monetary transmission mechanism. In low concentrated markets, the policy shock has a negligible effect on productivity, while a sizeable one on entry. To rationalize these empirical findings, we build a New Keynesian model where the pool of heterogeneous producers is endogenous. By reducing borrowing costs and stimulating demand, a monetary easing attracts low productivity firms to the market, inducing a reduction in average productivity. However, after few periods, the resulting increase in competition cleanses the market of unproductive firms, leading to a productivity overshooting together with an undershooting of the entry rate. Market concentration affects the nature of new entrants, and alters the transmission of the shock through the extensive margin.

Keywords: Monetary policy; Firm heterogeneity; Concentration; Productivity; Firm entry (search for similar items in EconPapers)
JEL-codes: D42 E52 E58 L16 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Monetary policy, productivity, and market concentration (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:142:y:2022:i:c:s0014292121002737

DOI: 10.1016/j.euroecorev.2021.103999

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