Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297330 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2890
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
Monetary policy
firm heterogeneity
financial frictions
capital misallocation
JEL: 
E12
E22
E43
E52
L11
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6370-1
Document Type: 
Working Paper

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