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Financing of Firms, Labor Reallocation, and the Distributional Role of Monetary Policy

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  • Salem Abo‐Zaid
  • Anastasia Zervou

Abstract

We analyze monetary policy in a model with heterogeneous firms, where constrained firms finance operations through external financing and unconstrained firms use internal funds. We show that expansionary monetary policy increases the relative employment of constrained firms, while positive productivity shocks increase that of unconstrained firms. Our results agree with recent empirical findings, emphasizing the role of the monetary authority in reallocating resources across sectors with different financing capabilities. We also show that if the relative productivity of constrained firms is low, then expansionary monetary policy tilts resources towards less productive firms, which decreases the effectiveness of the policy in stimulating aggregate output.

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  • Salem Abo‐Zaid & Anastasia Zervou, 2020. "Financing of Firms, Labor Reallocation, and the Distributional Role of Monetary Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 790-823, April.
    • Handle: RePEc:bla:scandj:v:122:y:2020:i:2:p:790-823
    DOI: 10.1111/sjoe.12354
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    Cited by:

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    2. Kudlyak, Marianna & Sánchez, Juan M., 2017. "Revisiting the behavior of small and large firms during the 2008 financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 48-69.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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