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

Multiple version iconThere are 2 versions of this paper

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

Hartwig, Benny and Lieberknecht, Philipp, Monetary Policy, Firms' Extensive Margin and Productivity (March 18, 2020). Forthcoming at International Journal of Central Banking, Available at SSRN: https://ssrn.com/abstract=3556398 or http://dx.doi.org/10.2139/ssrn.3556398

Benny Hartwig (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt am Main, 60431
Germany

Philipp Lieberknecht

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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