Monetary policy, firm heterogeneity, and product variety

Masashige Hamano*, Francesco Zanetti

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts an important 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 incumbent firms from competition, reducing aggregate productivity. We provide empirical evidence on U.S. data that corroborates the relevance of monetary policy for product variety resulting from firm entry and exit.

Original languageEnglish
Article number104089
JournalEuropean Economic Review
Volume144
DOIs
Publication statusPublished - 2022 May

Keywords

  • Firm heterogeneity
  • Monetary policy
  • Product variety
  • Reallocation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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