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Monetary policy and the functional income distribution: Two million firms’ production dynamics

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  • Steininger, Lea
  • Fritsche, Jan P.

Abstract

We study the role of firm heterogeneity and cost structure in determining the distributional impact of euro area monetary policy at the firm level. Using local projections and high dimensional fixed effects, we first show that a one standard deviation contractionary monetary policy shock decreases firms’ labor share by 0.4 percentage points, on average. Next, we employ firms’ ideosyncratic leverage ratio as an exposure measure to mediate the euro-area-wide shocks to the firm level, and show that responses vary along two key dimensions: the labor share is most informative in distinguishing firms based on their response in payroll expenses, while firms’ leverage is most indicative in differentiating their response in value added. Our results inform the policy debate on transmission and redistribution effects of monetary policy, and suggest that the effectiveness of monetary policy may depend on the functional income distribution.

Suggested Citation

  • Steininger, Lea & Fritsche, Jan P., 2025. "Monetary policy and the functional income distribution: Two million firms’ production dynamics," European Economic Review, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001321
    DOI: 10.1016/j.euroecorev.2025.105082
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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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