Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy

97 Pages Posted: 10 Dec 2021

See all articles by Beatriz González

Beatriz González

Banco de España

Galo Nuño

Banco de España

Dominik Thaler

European Central Bank (ECB); Banco de España

Silvia Albrizio

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: 2021

Abstract

We analyze monetary policy in a New Keynesian model with heterogeneous firms and financial frictions. Firms differ in their productivity and net worth and face collateral constraints that cause capital misallocation. TFP endogenously depends on the time-varying distribution of firms. Although a reduction in real rates increases misallocation in partial equilibrium, general-equilibrium effects overturn this result: a monetary expansion increases the investment of high-productivity firms relatively more than that of low-productivity ones, crowding out the latter and increasing TFP. We provide empirical evidence based on Spanish granular data supporting this mechanism. This has important implications for optimal monetary policy. We show how a central bank without pre-commitments engineers an unexpected monetary expansion to increase TFP in the medium run. In the event of a cost-push shock, the central bank leans with the wind to increase demand and reduce misallocation.

Keywords: monetary policy, firm heterogeneity, financial frictions, misallocation

JEL Classification: E120, E220, E430, E520, L110

Suggested Citation

González, Beatriz and Nuno, Galo and Thaler, Dominik and Albrizio, Silvia, Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy (2021). CESifo Working Paper No. 9465, Available at SSRN: https://ssrn.com/abstract=3982028 or http://dx.doi.org/10.2139/ssrn.3982028

Beatriz González (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Galo Nuno

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Dominik Thaler

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Silvia Albrizio

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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