Monetary Policy, Firm Heterogeneity, and the Distribution of Investment Rates

53 Pages Posted: 28 Dec 2022

See all articles by Matthias Gnewuch

Matthias Gnewuch

University of Bonn

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn

Date Written: December 20, 2022

Abstract

We document three pieces of evidence about the investment channel of monetary policy. First, an interest rate cut reshapes the distribution of investment rates as it leads to fewer small or zero investment rates and more large investment rates. Second, the change in the distribution is more pronounced among young than old firms. We emphasize the relevance of the extensive margin—–firms deciding whether to invest or not—in explaining these findings. Third, a decomposition exercise indicates that the extensive margin accounts for around 50% of the effect of monetary policy on the average investment rate and more than 50% of the heterogeneous effect on young firms. To interpret these empirical findings, we build a heterogeneous-firm model with fixed adjustment costs and firm life-cycle dynamics. In the model, young (small) firms—often standing in for financially constrained firms—are more sensitive to monetary policy even without a financial accelerator mechanism.

Keywords: Investment Rate Distribution, Adjustment Costs, Lumpy Investment, Heterogeneous Sensitivity, Extensive Margin, Monetary Policy

JEL Classification: E52, E22, D21, D22

Suggested Citation

Gnewuch, Matthias and Zhang, Donghai, Monetary Policy, Firm Heterogeneity, and the Distribution of Investment Rates (December 20, 2022). Available at SSRN: https://ssrn.com/abstract=4307681 or http://dx.doi.org/10.2139/ssrn.4307681

Matthias Gnewuch

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Donghai Zhang (Contact Author)

Institute for Macroeconomics and Econometrics - University of Bonn ( email )

Bonn
Germany

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