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Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy

Author

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  • GONZÃ LEZ, 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.

Suggested Citation

  • GONZà LEZ, BEATRIZ & Nuño, Galo & Thaler, Dominik & Albrizio, Silvia, 2023. "Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy," CEPR Discussion Papers 18695, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18695
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    Cited by:

    1. is not listed on IDEAS
    2. Benjamin Schwanebeck & Luzie Thiel, 2025. "The Supply-Side Effects of Household Heterogeneity," MAGKS Papers on Economics 202503, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Karadi, Peter & Nakov, Anton & Nuño, Galo & Pasten, Ernesto & Thaler, Dominik, 2024. "Strike while the Iron is Hot: Optimal Monetary Policy with a Nonlinear Phillips Curve," CEPR Discussion Papers 19339, C.E.P.R. Discussion Papers.
    4. Karadi, Peter & Nakov, Anton & Nuño, Galo & Pasten, Ernesto & Thaler, Dominik, 2025. "Strike while the iron is hot – optimal monetary policy under state-dependent pricing," Working Paper Series 3068, European Central Bank.
    5. 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).
    6. Bianco, Timothy & Herrera, Ana María, 2025. "Monetary policy and credit flows: A tale of two effective lower bounds," Journal of Economic Dynamics and Control, Elsevier, vol. 175(C).
    7. Shunsuke Haba & Yuichiro Ito & Shogo Nakano & Takahiro Yamanaka, 2024. "Assessing the Long-Term Impact of Monetary Policy," Bank of Japan Working Paper Series 24-E-19, Bank of Japan.

    More about this item

    Keywords

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    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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