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Monetary policy and productivity: Unpacking multifaceted links

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  • Filiz Unsal
  • Guido Franco

Abstract

Relying on local projection methods and a large cross-country firm-level dataset, we provide a comprehensive assessment of how monetary policy shocks affect productivity dynamics. We find significant effects operating both through changes in firm-level productivity growth and through the reallocation of resources across firms. A 25-basis-point tightening (easing) reduces (raises) within-firm productivity growth by about 0.7 percentage points over five years, with the credit and cost channels playing the dominant role. These effects are amplified when financial development is weak or when monetary policy is pro-cyclical. On the reallocation side, easing episodes increase labour and capital misallocation by up to 7% over three years, partly by channelling resources toward zombie firms, with the impact strongest under low financial development, high barriers to competition, or during economic upturns, whereas monetary tightening does not, on average, significantly affect allocative efficiency.

Suggested Citation

  • Filiz Unsal & Guido Franco, 2025. "Monetary policy and productivity: Unpacking multifaceted links," OECD Economics Department Working Papers 1843, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1843-en
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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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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