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Monetary Policy, Firm Heterogeneity, and Product Variety

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  • Masashige Hamano

    (Waseda University)

  • Francesco Zanetti

    (University of Oxford)

Abstract

This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy.

Suggested Citation

  • Masashige Hamano & Francesco Zanetti, 2020. "Monetary Policy, Firm Heterogeneity, and Product Variety," Working Papers 2005, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2005
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    Cited by:

    1. Masashige Hamano & Francesco Pappadà, 2023. "Exchange Rate Policy and Firm Heterogeneity," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(3), pages 759-790, September.
    2. Dudley Cooke & Tatiana Damjanovic, 2021. "Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry," Working Papers 2021_02, Durham University Business School.
    3. Nguyen, Hang T. T., 2024. "Corporate taxation and total factor productivity: Evidence on a non-linear relationship," arqus Discussion Papers in Quantitative Tax Research 284, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Hartwig, Benny & Lieberknecht, Philipp, 2020. "Monetary policy, firm exit and productivity," Discussion Papers 61/2020, Deutsche Bundesbank.
    5. Andrea Colciago & Vivien Lewis & Branka Matyska, 2023. "Corporate taxes, productivity, and business dynamism," Working Papers 512, University of Milano-Bicocca, Department of Economics, revised May 2023.
    6. Hamano, Masashige & Zanetti, Francesco, 2022. "Monetary policy, firm heterogeneity, and product variety," European Economic Review, Elsevier, vol. 144(C).
    7. Angela De Martiis & Franziska J. Peter, 2023. "When companies don't die: Analyzing zombie firms in a low interest rate environment," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 73(01), pages 67-86, December.
    8. Le Xu & Yang Yu & Francesco Zanetti, 2024. "The Adoption and Termination of Suppliers over the Business Cycle," Discussion Papers 2416, Centre for Macroeconomics (CFM).
    9. Colciago, Andrea & Silvestrini, Riccardo, 2022. "Monetary policy, productivity, and market concentration," European Economic Review, Elsevier, vol. 142(C).
    10. Casares, Miguel & Khan, Hashmat & Poutineau, Jean-Christophe, 2020. "The extensive margin and US aggregate fluctuations: A quantitative assessment," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
    11. Daniel E. Rigobon & Thibaut Duprey & Artur Kotlicki & Philip Schnattinger & Soheil Baharian & Thomas R. Hurd, 2022. "Business Closures and (Re)Openings in Real-Time Using Google Places: Proof of Concept," JRFM, MDPI, vol. 15(4), pages 1-10, April.
    12. Bernstein, Joshua & Richter, Alexander W. & Throckmorton, Nathaniel A., 2021. "Cyclical net entry and exit," European Economic Review, Elsevier, vol. 136(C).
    13. Altavilla, Carlo & Barbiero, Francesca & Boucinha, Miguel & Burlon, Lorenzo, 2023. "The Great Lockdown: Pandemic response policies and bank lending conditions," European Economic Review, Elsevier, vol. 156(C).
    14. Pejman Peykani & Mostafa Sargolzaei & Amir Takaloo & Shahla Valizadeh, 2023. "The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach," Sustainability, MDPI, vol. 15(5), pages 1-21, March.

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    More about this item

    Keywords

    Monetary policy; firm heterogeneity; product variety; reallocation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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