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Financial Heterogeneity and the Investment Channel of Monetary Policy

Author

Listed:
  • Thomas Winberry

    (University of Chicago)

  • Pablo Ottonello

    (University of Michigan)

Abstract

We study the heterogeneous effects of monetary policy on firm-level investment and their implications for the aggregate transmission mechanism. Empirically, we find that firms with low levels of liquid assets and/or high levels of debt are substantially less responsive to identified monetary shocks in terms of their capital investment, inventory investment, and stock returns. We build a heterogeneous firm new Keynesian model featuring financial frictions consistent with this fact. In the model, firms with low net worth find it costlier to finance investment and are therefore less willing to respond to monetary shocks. The aggregate effect of monetary policy therefore depends on the distribution of net worth; it is weak when balance sheets are week, but becomes stronger as they recover.

Suggested Citation

  • Thomas Winberry & Pablo Ottonello, 2017. "Financial Heterogeneity and the Investment Channel of Monetary Policy," 2017 Meeting Papers 598, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:598
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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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