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

Author

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  • Matthias Gnewuch

Abstract

We document that an interest rate cut reshapes the distribution of investment rates. Specifically, expansionary monetary policy leads to fewer small and zero investment rates and more large investment rates. This change in the shape of the investment rate distribution is particularly pronounced among young firms. We emphasise the relevance of the extensive margin investment decision—whether to invest or not—in explaining these findings. A decomposition reveals that the extensive margin contributes around 50% to monetary policy’s effect on the average investment rate and over 50% to the heterogeneous effect on young firms. To rationalise these findings and study their aggregate implications, we develop a heterogeneous-firm model with fixed adjustment costs and firm life cycle dynamics.

Suggested Citation

  • Matthias Gnewuch, 2024. "Monetary policy, firm heterogeneity, and the distribution of investment rates," Working Papers 61, European Stability Mechanism.
    • Handle: RePEc:stm:wpaper:61
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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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