Title: Monetary policy, firm heterogeneity, and the distribution of investment rates
Download PDF: Working Paper 61
This paper studies the role of lumpy investment for the transmission of monetary policy, its impact on aggregate investment, and the heterogeneous effects across young and old firms.
Authors: Matthias Gnewuch (ESM) and Donghai Zhang (National University of Singapore and University of Bonn)
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.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Investment Rate Distribution, Adjustment Costs, Lumpy Investment, Heterogeneous Sensitivity, Extensive Margin, Monetary Policy
JEL codes: E52, E22, D21, D22