The resource reallocation effect of monetary policy

Research output: Journal PublicationArticlepeer-review


This paper studies the heterogeneous responses of firms to monetary policy shocks and the possible adverse effect of expansionary monetary policy on resource reallocation. Using Chinese firm-level data, we find that when expansionary monetary shock hits the economy, less productive firms are more responsive than productive firms in terms of resource accumulation. We identify two mechanisms for this effect. First, less productive firms accumulate net worth more slowly. They have higher leverage ratio and are more sensitive to monetary policy changes (the intensive margin). Second, monetary expansion relaxes borrowing constraints, which enables unproductive firms to survive. The congestion effect prevents resources from allocating to more productive firms. Our finding is robust even if we use private firm subsamples or avoid the massive fiscal stimulus in China around 2009. We provide a simple model of firm dynamics to capture these effects.

Original languageEnglish
Pages (from-to)665-683
Number of pages19
JournalInternational Journal of Finance and Economics
Issue number1
Early online date21 Sept 2022
Publication statusPublished - 21 Sept 2022


  • extensive margin
  • intensive margin
  • leverage ratio
  • monetary policy
  • resource reallocation
  • total factor productivity

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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