Monetary Policy, Firms' Extensive Margin and Productivity
Forthcoming at International Journal of Central Banking
85 Pages Posted: 13 Apr 2020 Last revised: 22 Jul 2022
There are 2 versions of this paper
Monetary Policy, Firms' Extensive Margin and Productivity
Monetary Policy, Firm Exit and Productivity
Date Written: March 18, 2020
Abstract
This paper explores the effect of conventional monetary policy on aggregate productivity through firms' decisions to enter into or exit production. In a general equilibrium model with heterogeneous firms, we show that a monetary easing lowers productivity if it raises corporate profits: a rise in profitability allows low-productivity incumbents to remain active and unproductive new firms to enter production. Empirically, we find that expansionary monetary policy indeed raises profits, reduces firm exit and increases entry. However, we do not find compelling evidence of an associated fall in aggregate productivity. Productivity decreases for small firms only. Entry and exit of unproductive firms induced by monetary policy hence appear of less quantitative importance for aggregate productivity than the theory suggests.
Keywords: Firm exit, firm entry, corporate profits, TFP, zombification.
JEL Classification: E24, E32, E52, E58, L11
Suggested Citation: Suggested Citation