Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy

Category: Macro Seminar
When: 17 Januar 2023
, 14:15
 - 15:30
Where: HoF E.01/Deutsche Bank
Speaker: Galo Nuño (Bank of Spain)

Title: 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 in[1]creases 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.


Research - Galo Nuño (