The Impact of Monetary Policy on Firms’ Efficiency

Abstract

Despite the key role an increase in production efficiency plays in improving the competitiveness of the economy, the efficiency of production is not reflected in the objectives of monetary policy. The paper investigates the impact of the interest rate on firms’ efficiency and argues that it is not the interest rate itself that matters, but the gap between the interest rate and profitability in the real sector, and the closer the interest rate to the level of profitability in the real sector, the higher TFP growth.
It is also argued that the practice of debt refinancing inherent in the debt-based banking model negatively affects firms’ efficiency and limits the ability of Central Bank to promote firms’ efficiency. Since the practice of debt refinancing is impossible in the trade credit banking model, in this model,
monetary policy is a more efficient in improving firms’ efficiency compared to the debt banking model.

Keywords: interest rate, monetary policy, Ponzi finance, profitability in the real sector, total factor productivity, debt-based banking model, trade credit banking model.

JEL Classification: E52