Monetary Policy, Firm Heterogeneity, and Product Variety

Masashige Hamano and Francesco Zanetti

No 2102, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts an important 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 incumbent 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 that corroborates the relevance of monetary policy for product variety resulting from firm entry and exit.

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)
Pages: 48 pages
Date: 2021-01
New Economics Papers: this item is included in nep-bec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Monetary policy, firm heterogeneity, and product variety (2022)
Working Paper: Monetary policy, firm heterogeneity, and product variety (2021)
Working Paper: Monetary Policy, Firm Heterogeneity, and Product Variety (2020)
Working Paper: Monetary Policy, Firm Heterogeneity, and Product Variety (2020)
Working Paper: Monetary Policy, Firm Heterogeneity, and Product Variety (2020)
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