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Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

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  • Cooper Howes

    (Federal Reserve Board)

Abstract

While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of US manufacturing firms, I show that this increase is driven by the types of firms which are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back. Removing firm financial constraints in the model dampens the response of manufacturing output to monetary shocks by about 25%.

Suggested Citation

  • Cooper Howes, 2025. "Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment," The Review of Economics and Statistics, MIT Press, vol. 107(6), pages 1603-1619, November.
    • Handle: RePEc:tpr:restat:v:107:y:2025:i:6:p:1603-1619
    DOI: 10.1162/rest_a_01351
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment
      by Christian Zimmermann in NEP-DGE blog on 2022-01-04 16:55:53

    Citations

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    Cited by:

    1. is not listed on IDEAS
    2. Balleer, Almut & Zorn, Peter, 2019. "Monetary Policy, Price Setting, and Credit Constraints," CEPR Discussion Papers 14163, Centre for Economic Policy Research.
    3. Jackson, Laura E. & Kurt, Ezgi, 2025. "Downward wage rigidity and asymmetric effects of monetary policy," Journal of Macroeconomics, Elsevier, vol. 83(C).
    4. Madeira, Carlos & Salazar, Leonardo, 2023. "The impact of monetary policy on a labor market with heterogeneous workers: The case of Chile," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(2).
    5. Balleer, Almut & Zorn, Peter, 2020. "The Micro-level Price Response to Monetary Policy," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224557, Verein für Socialpolitik / German Economic Association.
    6. Singh, Aarti & Suda, Jacek & Zervou, Anastasia, 2021. "Heterogeneous labour market response to monetary policy: small versus large firms," Working Papers 2021-07, University of Sydney, School of Economics, revised Nov 2021.

    More about this item

    JEL classification:

    • 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

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