Firm heterogeneity, capital misallocation and optimal monetary policy

Beatriz González, Galo Nuño Barrau, Dominik Thaler and Silvia Albrizio ()
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Silvia Albrizio: International monetary fund

No 2145, Working Papers from Banco de España

Abstract: We analyze monetary policy in a New Keynesian model with heterogeneous firms and financial frictions. Firms differ in their productivity and net worth and face collateral constraints that cause capital misallocation. TFP endogenously depends on the time-varying distribution of firms. Although a reduction in real rates increases misallocation in partial equilibrium, general-equilibrium effects overturn this result: a monetary expansion increases the investment of high-productivity firms relatively more than that of low-productivity ones, crowding out the latter and increasing TFP. We provide empirical evidence based on Spanish granular data supporting this mechanism. This has important implications for optimal monetary policy. We show how a central bank without pre-commitments engineers an unexpected monetary expansion to increase TFP in the medium run. In the event of a cost-push shock, the central bank leans with the wind to increase demand and reduce misallocation.

Keywords: Monetary policy; firm heterogeneity; financial frictions; misallocation (search for similar items in EconPapers)
JEL-codes: E12 E22 E43 E52 L11 (search for similar items in EconPapers)
Pages: 85 pages
Date: 2021-12
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Firm heterogeneity, capital misallocation and optimal monetary policy (2024)
Working Paper: Firm heterogeneity, capital misallocation and optimal monetary policy (2023)
Working Paper: Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy (2023)
Working Paper: Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy (2021)
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