A Tale of Two Margins: Monetary Policy and Capital Misallocation

IMF Working Papers, June 14, 2024

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Canonical URL: A Tale of Two Margins: Monetary Policy and Capital Misallocation

Paper investigates the impact of monetary policy on capital misallocation and its heterogeneous effects on firms.
Uses Spanish firm-level data spanning 1999 to 2019.
Finds that expansionary monetary policy leads to a reduction in capital misallocation, measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK).
Authors: Silvia Albrizio, Beatriz Gonzalez, Dmitry Khametshin.
Publication date: June 14, 2024.
Series: Working Paper No. 2024/121; Issue: 121; Pages: 62.
DOI: https://doi.org/10.5089/9798400279881.001
ISBN: 9798400279881; ISSN: 1018-5941.

Expansionary monetary policy reduces capital misallocation as measured by within-industry dispersion of firms’ MRPK.
Intensive margin:
- High-MRPK firms exhibit a greater increase in investment following a monetary policy easing surprise.
- High-MRPK firms exhibit a greater increase in debt financing relative to low-MRPK firms following a monetary policy easing surprise.
- A firm’s MRPK is a stronger determinant of its investment sensitivity to monetary policy than age, leverage, or cash.
- MRPK is a reliable proxy for financial frictions.
Extensive margin:
- Monetary policy easing stimulates entry and discourages exit, although the quantitative impact is small.
- No significant changes in the composition of high- and low-MRPK entrants or exiters were found.
Overall conclusion: Expansionary monetary policy primarily reduces capital misallocation by alleviating financial frictions among incumbent productive and constrained firms.

Intensive margin channel: Differential responses in investment and debt financing across firms sorted by MRPK lead to reallocation of capital toward higher-MRPK firms within industries.
Extensive margin channel: Entry increases and exit decreases with monetary easing, but these effects are quantitatively small and do not alter the MRPK composition of entrants and exiters.
Financial frictions interpretation: MRPK captures firms’ constraints; monetary easing relaxes financing constraints for productive incumbents, driving most of the misallocation reduction.

Geographic focus: Spain (Spanish firm-level data).
Time coverage: 1999 to 2019.
Subjects: Economic theory, Financial frictions, Labor, Monetary expansion, Monetary policy, Monetary stance, Unemployment rate.
Keywords: B monetary policy, effects of monetary policy, financial frictions, Global, investment, misallocation, Monetary expansion, monetary policy, monetary policy easing, monetary policy shock, Monetary stance, MRPK firm, productivity, Unemployment rate.

Source: A Tale of Two Margins: Monetary Policy and Capital Misallocation — IMF Working Papers, June 14, 2024.