Monetary Policy, Firms’ Extensive Margin, and Productivity

Benny Hartwig and Philipp Lieberknecht
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Benny Hartwig: Deutsche Bundesbank

International Journal of Central Banking, 2025, vol. 21, issue 1, 1-81

Abstract: This paper explores the effect of conventional monetary policy on aggregate productivity through firms’ decisions to enter into or exit production. In a general equilibrium model with heterogeneous firms, we show that a monetary easing lowers productivity if it raises corporate profits: a rise in profitability allows low-productivity incumbents to remain active and unproductive new firms to enter production. Empirically, we find that expansionary monetary policy indeed raises profits, reduces firm exit, and increases entry. However, we do not find compelling evidence of an associated fall in aggregate productivity. Productivity decreases for small firms only. Entry and exit of unproductive firms induced by monetary policy hence appear of less quantitative importance for aggregate productivity than the theory suggests.

Date: 2025
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