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Firm heterogeneity, capital misallocation and optimal monetary policy

Author

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  • González, Beatriz
  • Nuño, Galo
  • Thaler, Dominik
  • Albrizio, Silvia

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 Classification: E12, E22, E43, E52, L11

Suggested Citation

  • González, Beatriz & Nuño, Galo & Thaler, Dominik & Albrizio, Silvia, 2024. "Firm heterogeneity, capital misallocation and optimal monetary policy," Working Paper Series 2890, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242890
    Note: 2253012
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    References listed on IDEAS

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    Cited by:

    1. Norbert Ernst & Nico Pintar & Richard Sellner, 2023. "Resource Misallocation and TFP Gap Development in Austria (Richard Sellner, Nico Pintar, Norbert Ernst)," Working Papers 246, Oesterreichische Nationalbank (Austrian Central Bank).

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    More about this item

    Keywords

    capital misallocation; financial frictions; firm heterogeneity; monetary policy;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; 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

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