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Monetary policy, firm heterogeneity, and the distribution of investment rates

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  • Gnewuch, Matthias
  • Zhang, Donghai

Abstract

We document that an interest rate cut reshapes the cross-sectional distribution of investment rates—fewer zero and small investment rates and more large ones—and particularly so among young firms. The extensive margin investment decision—whether to invest or not—is essential in explaining these findings. We develop a heterogeneous-firm model with fixed adjustment costs and firm life-cycle dynamics to rationalize the evidence and study the implications for the investment channel. The extensive margin investment decision makes monetary policy less effective whenever few firms are inclined to invest: in downturns, but also in economies with low business dynamism and few young firms.

Suggested Citation

  • Gnewuch, Matthias & Zhang, Donghai, 2025. "Monetary policy, firm heterogeneity, and the distribution of investment rates," Journal of Monetary Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:moneco:v:149:y:2025:i:c:s0304393224001740
    DOI: 10.1016/j.jmoneco.2024.103721
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    More about this item

    Keywords

    Investment rate distribution; Adjustment costs; Lumpy investment; Heterogeneous sensitivity; Extensive margin; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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