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The Misallocation Channel of Monetary Policy
1 : Universität Mannheim
2 : Universität Mannheim
While the effects of monetary policy shocks on macroeconomic aggregates
are well-documented, surprisingly little is known about the aggregate TFP
response. This paper establishes that contractionary monetary policy shocks
lower aggregate TFP. Using firm-level data, we further show that capital
misallocation increases. Quantitatively, the increase in capital misallocation
explains a large part of the TFP decline. Other transmission channels, including
utilization and markups, explain little of the TFP decline. We argue that size-
dependent financial frictions are key to understand the monetary transmission
channel. Consistent with this view, we find that a large part of the misalloca-
tion response is driven by an increase in misallocation across small firms.
are well-documented, surprisingly little is known about the aggregate TFP
response. This paper establishes that contractionary monetary policy shocks
lower aggregate TFP. Using firm-level data, we further show that capital
misallocation increases. Quantitatively, the increase in capital misallocation
explains a large part of the TFP decline. Other transmission channels, including
utilization and markups, explain little of the TFP decline. We argue that size-
dependent financial frictions are key to understand the monetary transmission
channel. Consistent with this view, we find that a large part of the misalloca-
tion response is driven by an increase in misallocation across small firms.
