Template-Type: ReDIF-Paper 1.0
Author-Name: Beatriz González
Author-X-Name-First: Beatriz
Author-X-Name-Last: González
Author-Name: Galo Nuño Barrau
Author-X-Name-First: Galo
Author-X-Name-Last: Nuño Barrau
Author-Name: Dominik Thaler
Author-X-Name-First: Dominik
Author-X-Name-Last: Thaler
Author-Name: Silvia Albrizio
Author-X-Name-First: Silvia
Author-X-Name-Last: Albrizio
Title: Firm heterogeneity, capital misallocation and optimal monetary policy
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.
Creation-Date: 2023-11
File-URL: https://www.bis.org/publ/work1148.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1148.htm
File-Format: text/html
Number: 1148
Keywords: monetary policy, firm heterogeneity, financial frictions, capital misallocation
Classification-JEL: E12, E22, E43, E52, L11
Handle: RePEc:bis:biswps:1148