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Firm Heterogeneity and the Transmission of Central Bank Credit Policy

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  • Konrad Kuhmann

Abstract

I study the role of firm heterogeneity for the transmission of unconventional monetary policy in the form of “credit policy” à la Gertler and Karadi (2011). To this end, I lay out a Two-Agent New-Keynesian model with financially constrained and unconstrained firms and a financial intermediary with an endogenous leverage constraint. I find that, when firms are heterogeneous, aggregate investment is substantially less responsive to credit policy compared to an identical firm setting. Moreover, when debt markets are segmented, credit policy directed exclusively at financially unconstrained firms is most effective. My paper provides a tractable framework to illustrate mechanisms through which firm heterogeneity affects the transmission of credit policy. According to my findings, the presence of firm heterogeneity can be expected to make credit policy less effective than predicted by a representative agent framework.

Suggested Citation

  • Konrad Kuhmann, 2023. "Firm Heterogeneity and the Transmission of Central Bank Credit Policy," Berlin School of Economics Discussion Papers 0012, Berlin School of Economics.
    • Handle: RePEc:bdp:dpaper:0012
    DOI: 10.48462/opus4-4917
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    References listed on IDEAS

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    1. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
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    4. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    5. Robert Kurtzman & David Zeke, 2020. "Misallocation Costs of Digging Deeper into the Central Bank Toolkit," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 94-126, October.
    6. James Cloyne & Clodomiro Ferreira & Maren Froemel & Paolo Surico, 2023. "Monetary Policy, Corporate Finance, and Investment," Journal of the European Economic Association, European Economic Association, vol. 21(6), pages 2586-2634.
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    More about this item

    Keywords

    Credit Policy; Firm Heterogeneity; Investment; Financial Frictions;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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