Reallocation Effects of Monetary Policy

Kozo Ueda

No 128, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Central banks across the globe are paying increasing attention to the distributional aspects of monetary policy. In this study, we focus on reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms tend to grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into endogenous growth with heterogeneous firms. The model shows that, under a high nominal growth rate, firms of inferior quality bear a heavier burden of menu cost payments than do firms of superior quality. This outcome increases the market share of superior firms, while some inferior firms exit the market. This reallocation effect, if strong, yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity, whereas standard New Keynesian models often conclude that zero nominal growth is optimal. Moreover, the presence of menu costs can improve welfare.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: REALLOCATION EFFECTS OF MONETARY POLICY (2022)
Working Paper: Reallocation effects of monetary policy (2020)
Working Paper: Reallocation Effects of Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:128

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