Financial Heterogeneity and the Investment Channel of Monetary Policy

Thomas Winberry and Pablo Ottonello
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Thomas Winberry: University of Chicago

No 598, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study the heterogeneous effects of monetary policy on firm-level investment and their implications for the aggregate transmission mechanism. Empirically, we find that firms with low levels of liquid assets and/or high levels of debt are substantially less responsive to identified monetary shocks in terms of their capital investment, inventory investment, and stock returns. We build a heterogeneous firm new Keynesian model featuring financial frictions consistent with this fact. In the model, firms with low net worth find it costlier to finance investment and are therefore less willing to respond to monetary shocks. The aggregate effect of monetary policy therefore depends on the distribution of net worth; it is weak when balance sheets are week, but becomes stronger as they recover.

Date: 2017
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Working Paper: Financial Heterogeneity and the Investment Channel of Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:598

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