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Monetary Policy, Firm Heterogeneity, and Product Variety

Masashige Hamano () and Francesco Zanetti ()

No 2004, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy.

Keywords: Monetary policy; firm heterogeneity; product variety; reallocation (search for similar items in EconPapers)
JEL-codes: E32 E52 L51 O47 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-bec, nep-cwa, nep-mac and nep-mon
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Working Paper: Monetary policy, firm heterogeneity, and product variety (2021) Downloads
Working Paper: Monetary Policy, Firm Heterogeneity, and Product Variety (2020) Downloads
Working Paper: Monetary Policy, Firm Heterogeneity, and Product Variety (2020) Downloads
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