Firm heterogeneity, capital misallocation and optimal monetary policy

Beatriz González, Galo Nuño, Dominik Thaler and Silvia Albrizio

No 2890, Working Paper Series from European Central Bank

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. JEL Classification: E12, E22, E43, E52, L11

Keywords: capital misallocation; financial frictions; firm heterogeneity; monetary policy (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mon
Note: 2253012
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 (2023)
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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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242890

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