Reallocation Effects of Monetary Policy

90 Pages Posted: 15 Jun 2020

See all articles by Daisuke Miyakawa

Daisuke Miyakawa

Hitotsubashi University

Koki Oikawa

Waseda University

Kozo Ueda

Waseda University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: June 11, 2020

Abstract

Responding to the increased attention on the distributional aspects of monetary policy, we investigate the reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms invest more in R&D and grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into R&D-driven endogenous growth with heterogeneous firms. The model shows that high nominal growth leads to an increase in the market share of innovative firms because menu-cost burdens are relatively heavier for less innovative firms. This reallocation effect 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. Moreover, the presence of menu costs can improve welfare.

Keywords: Reallocation, firm dynamics, creative destruction, menu cost, optimal inflation rate

JEL Classification: E5, O3, O4

Suggested Citation

Miyakawa, Daisuke and Oikawa, Koki and Ueda, Kozo, Reallocation Effects of Monetary Policy (June 11, 2020). CAMA Working Paper No. 59/2020, Available at SSRN: https://ssrn.com/abstract=3624690 or http://dx.doi.org/10.2139/ssrn.3624690

Daisuke Miyakawa

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Koki Oikawa

Waseda University ( email )

1-104 Totsukamachi, Shinjuku-ku
tokyo, 169-8050
Japan

Kozo Ueda (Contact Author)

Waseda University ( email )

1-104 Totsukamachi, Shinjuku-ku
tokyo, 169-8050
Japan

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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