Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy

Beatriz Gonzã Lez, Nuño, Galo, Dominik Thaler and Silvia Albrizio

No 18695, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial, or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism.

Keywords: Monetary; policy (search for similar items in EconPapers)
JEL-codes: E12 E22 E43 E52 L11 (search for similar items in EconPapers)
Date: 2023-12
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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 (2021)
Working Paper: Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy (2021)
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