Financing of Firms, Labor Reallocation and the Distributional Role of Monetary Policy

Scandinavian Journal of Economics, 2020, Volume 122(2), pages 790-823

43 Pages Posted: 21 Jun 2022

See all articles by Salem M. Abo-Zaid

Salem M. Abo-Zaid

University of Maryland, Baltimore County

Anastasia Zervou

University of Texas at Austin

Date Written: June 25, 2018

Abstract

We analyze monetary policy in a heterogeneous firm environment where cash-constrained firms finance operations through external financing and cash-unconstrained firms operate using internal funds. We show that firms respond differently to shocks: expansionary monetary policy sharply increases the relative employment of the constrained firms while positive productivity shocks induce a rise in the relative employment of the unconstrained firms. Our analysis points to a clear role of monetary policy in reallocating resources across sectors that differ in their financing capabilities. Furthermore, the predictions of our model match the empirical evidence in that financially constrained firms react sharply to monetary policy shocks but are less cyclical than un- constrained firms following productivity shocks. We also show that if the constrained firms are less productive than the unconstrained ones, then a monetary policy expansion tilts resources towards the less productive firms, which renders monetary policy less effective in stimulating aggregate economic activity.

Keywords: Heterogeneous Firms; Monetary Policy; Labor Reallocation; Firms’ financing

JEL Classification: E32, E44, E52

Suggested Citation

Abo-Zaid, Salem M. and Zervou, Anastasia, Financing of Firms, Labor Reallocation and the Distributional Role of Monetary Policy (June 25, 2018). Scandinavian Journal of Economics, 2020, Volume 122(2), pages 790-823, Available at SSRN: https://ssrn.com/abstract=4137589

Salem M. Abo-Zaid

University of Maryland, Baltimore County ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-2498 (Phone)

HOME PAGE: http://sites.google.com/site/salemabozaidshomepage/home

Anastasia Zervou (Contact Author)

University of Texas at Austin ( email )

6906 N Loop 1604 W
San Antonio, TX Texas 78249
United States

HOME PAGE: http://https://liberalarts.utexas.edu/economics/faculty/az7379

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