REALLOCATION EFFECTS OF MONETARY POLICY

Daisuke Miyakawa, Koki Oikawa and Kozo Ueda

International Economic Review, 2022, vol. 63, issue 2, 947-975

Abstract: We construct a model that introduces nominal rigidity into R&D‐driven endogenous growth with heterogeneous firms. The model shows that high nominal growth leads to an increase in the market share of innovative firms as menu‐cost burdens are relatively heavier for less innovative firms. This reallocation effect yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity. Moreover, menu costs can improve welfare. Japanese firm‐level data are consistent with the model implication in that under higher inflation, large firms grow faster than small firms.

Date: 2022
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https://doi.org/10.1111/iere.12558

Related works:
Working Paper: Reallocation effects of monetary policy (2020)
Working Paper: Reallocation Effects of Monetary Policy (2019)
Working Paper: Reallocation Effects of Monetary Policy (2018)
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