A Tale of Two Margins: Monetary Policy and Capital Misallocation

By Silvia Albrizio, Beatriz Gonzalez, Dmitry Khametshin

June 14, 2024

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Silvia Albrizio, Beatriz Gonzalez, and Dmitry Khametshin. A Tale of Two Margins: Monetary Policy and Capital Misallocation, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper investigates the impact of monetary policy on capital misallocation, focusing on its heterogeneous effects on firms. Using Spanish firm-level data spanning 1999 to 2019, we demonstrate that expansionary monetary policy leads to a reduction in capital misallocation, measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyze the underlying mechanism, we first examine the intensive margin and find that high-MRPK firms exhibit a greater increase in investment and debt financing relative to low-MRPK firms following a monetary policy easing surprise. We also find that a firm’s MRPK serves as a stronger determinant of its investment sensitivity to monetary policy than factors such as age, leverage, or cash, suggesting that MRPK is a reliable proxy for financial frictions. Next, we explore the extensive margin and demonstrate that monetary policy easing stimulates entry and discourages exit, although the quantitative impact is small. Moreover, we find no significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, our findings suggest that expansionary monetary policy primarily reduces capital misallocation by alleviating financial frictions among incumbent productive and constrained firms.

Subject: Economic theory, Financial frictions, Labor, Monetary expansion, Monetary policy, Monetary stance, Unemployment rate

Keywords: B monetary policy, Effects of monetary policy, Financial frictions, Global, Investment, Misallocation, Monetary expansion, Monetary policy, Monetary policy easing, Monetary policy shock, Monetary stance, MRPK firm, Productivity, Unemployment rate

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/121
Stock No:

WPIEA2024121
ISBN:

9798400279881
ISSN:

1018-5941

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