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Beatriz González
- 19 April 2024
- RESEARCH BULLETIN - No. 118Details
- Abstract
- Some firms have the capacity to contribute significantly to economic productivity but cannot obtain the necessary capital for investment, which instead flows to less productive firms. While “misallocation of capital” and its detrimental impact on productivity is traditionally beyond the scope of central banks, monetary policy can influence it through firms’ investment decisions. Using a New Keynesian model and granular data on Spanish firms, our results show that expansionary monetary policy reduces capital misallocation. However, in committing to an optimal policy course, central banks are better off sticking to price stability rather than exploiting this channel to influence productivity.
- JEL Code
- E12 : Macroeconomics and Monetary Economics→General Aggregative Models→Keynes, Keynesian, Post-Keynesian
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms
- 16 January 2024
- WORKING PAPER SERIES - No. 2890Details
- Abstract
- This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism.
- JEL Code
- E12 : Macroeconomics and Monetary Economics→General Aggregative Models→Keynes, Keynesian, Post-Keynesian
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms