Monetary Policy, Investment, and Firm Heterogeneity

Aggregate investment is central to the conduct of monetary both empirically and theoretically. However, existing studies largely ignore the extensive micro-level heterogeneity in investment behavior across firms. In this paper, we reassess the investment channel of monetary policy in the presence of this heterogeneity by empirically studying the response of micro-level investment to monetary shocks, and using these estimates to build a quantitative heterogeneous firm model for policy analysis. Our empirical analysis combines firm-level Compustat investment data with a high-frequency identification of monetary policy shocks. We will then build a quantitative general equilibrium model incorporating the relevant sources of heterogeneity identified in the data. We will use the model to study two broad issues. First, we will compute the average aggregate effect of monetary policy shocks, and compare the results to the estimated VAR literature. Second, we will study how the distribution of underlying heterogeneity shapes the response to monetary shocks at different points in time. How does the aggregate effect of monetary policy depend on the distribution of productivity, capital, or net worth? Does it vary substantially over the cycle? What does all this imply for the design of monetary policy going forward?