A Tale of Two Margins: Monetary Policy and Capital Misallocation

Silvia Albrizio, Beatriz Gonzalez and Dmitry Khametshin

No 2024/121, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the impact of monetary policy on capital misallocation, focusing on its heterogeneous effects on firms. Using Spanish firm-level data spanning 1999 to 2019, we demonstrate that expansionary monetary policy leads to a reduction in capital misallocation, measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyze the underlying mechanism, we first examine the intensive margin and find that high-MRPK firms exhibit a greater increase in investment and debt financing relative to low-MRPK firms following a monetary policy easing surprise. We also find that a firm’s MRPK serves as a stronger determinant of its investment sensitivity to monetary policy than factors such as age, leverage, or cash, suggesting that MRPK is a reliable proxy for financial frictions. Next, we explore the extensive margin and demonstrate that monetary policy easing stimulates entry and discourages exit, although the quantitative impact is small. Moreover, we find no significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, our findings suggest that expansionary monetary policy primarily reduces capital misallocation by alleviating financial frictions among incumbent productive and constrained firms.

Keywords: monetary policy; financial frictions; investment; misallocation; productivity; monetary policy easing; effects of monetary policy; monetary policy shock; B monetary policy; MRPK firm; Monetary expansion; Monetary stance; Unemployment rate; Global (search for similar items in EconPapers)
Pages: 62
Date: 2024-06-14
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=550533 (application/pdf)

Related works:
Working Paper: A tale of two margins: monetary policy and capital misallocation (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2024/121

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().