The Resource Reallocation Effect of Monetary Policy

Research output: Working paper


This paper studies the possible adverse effect of expansionary monetary policy on resource reallocation. Using Chinese firm level data, we find evidence that the resources are reallocated toward less efficient firms during monetary expansion, and such effect of resource misallocation is more severe among private firms. This casts doubt on the traditional wisdom that policies favoring state-owned enterprises are the main reason for resource misallocation in China. We investigate alternative mechanisms that monetary expansion itself can cause resource reallocation. We show that credit constraint is heterogeneous among firms with different productivities and leverages. Monetary expansion favors less productive and highly leveraged firms more (intensive margin). It also enables less productive firms to enter the market and survive (extensive margin(. We then build a DSGE model with heterogeneous firms and endogenous entry and exit. We study the short-run and long-run dynamic effect of monetary policy on resource reallocation and TFP growth.
Original languageEnglish
Publication statusIn preparation - 2022

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