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A tale of two margins: Monetary policy and capital misallocation

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  • Albrizio, Silvia
  • González, Beatriz
  • Khametshin, Dmitry

Abstract

This paper explores the impact of monetary policy on capital misallocation through its heterogeneous effects on firms. Using the panel of the quasi-universe of Spanish firms from 2002 to 2019, we show that expansionary monetary policy shocks reduce capital misallocation, as measured by within-industry dispersion in the marginal revenue product of capital (MRPK). We explore the underlying mechanisms. Considering the intensive margin, we find that high-MRPK firms respond more strongly to monetary easing, increasing both investment and debt. Moreover, MRPK outperforms conventional proxies for financial frictions—such as firm age, leverage, or liquidity—in explaining the sensitivity of investment to monetary policy, providing evidence that it captures these frictions more accurately. On the extensive margin, monetary easing modestly boosts firm entry and reduces exit in the short run, but without altering the MRPK composition of entrants and exiters. Overall, our results suggest that expansionary monetary policy improves capital allocation mainly through the intensive margin, by relaxing financial constraints of productive but constrained firms.

Suggested Citation

  • Albrizio, Silvia & González, Beatriz & Khametshin, Dmitry, 2026. "A tale of two margins: Monetary policy and capital misallocation," European Economic Review, Elsevier, vol. 185(C).
    • Handle: RePEc:eee:eecrev:v:185:y:2026:i:c:s001429212600022x
    DOI: 10.1016/j.euroecorev.2026.105278
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    2. Adamopoulou, Effrosyni & Díez-Catalán, Luis & Villanueva, Ernesto, 2025. "Staggered contracts and unemployment during recessions," Journal of Monetary Economics, Elsevier, vol. 156(C).
    3. Okan Akarsu & Mehmet Selman Çolak & Hatice Karahan & Huzeyfe Torun, 2025. "The heterogeneous impact of monetary policy announcements on firms’ financial outcomes," Empirical Economics, Springer, vol. 69(6), pages 3045-3087, December.
    4. Central Bank of the Republic of Türkiye, 2025. "The heterogeneous impact of monetary policy announcements on firms' financial outcomes," BIS Papers chapters, in: Bank for International Settlements (ed.), How can central banks take account of differences across households and firms for monetary policy?, volume 127, pages 295-330, Bank for International Settlements.
    5. Alam, M. Jahangir, 2025. "Productivity responses of high-tech firms to monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    6. Okan Akarsu & Mehmet Selman Colak & Hatice Karahan & Huzeyfe Torun, 2025. "The Heterogeneous Impact of Monetary Policy Announcements on Firms’ Financial Outcomes," Working Papers 2514, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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