Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy
We analyze monetary policy in a New Keynesian model with heterogeneous
firms and financial frictions. Firms differ in their productivity and net worth and
face collateral constraints that cause capital misallocation. TFP endogenously
depends on the time-varying distribution of firms. A monetary expansion increases the investment of constrained firms with a high marginal revenue product
of capital (MRPK) relatively more than that of low-MRPK ones, crowding out
the latter and increasing TFP. We provide empirical evidence based on Spanish
granular data supporting this mechanism. This has important implications for
optimal monetary policy design. First, a central bank without pre-commitments
engineers an unexpected monetary expansion to increase TFP in the medium run.
Second, the divine coincidence holds after a demand shock. Third, if nominal rates
are constrained by the zero lower bound, the optimal policy prescribes that rates
should remain low for much longer than under complete markets.