We identify a new channel through which monetary policy affects productivity at business cycle frequencies. An unexpected monetary easing initially reduces average labor productivity, which then overshoots its pre-shock level. At the same time, the firm entry rate rises in response to the shock and then undershoots. Market concentration matters for the monetary transmission mechanism. In low concentrated markets, the policy shock has a negligible effect on productivity, while a sizeable one on entry. To rationalize these empirical findings, we build a New Keynesian model where the pool of heterogeneous producers is endogenous. By reducing borrowing costs and stimulating demand, a monetary easing attracts low productivity firms to the market, inducing a reduction in average productivity. However, after few periods, the resulting increase in competition cleanses the market of unproductive firms, leading to a productivity overshooting together with an undershooting of the entry rate. Market concentration affects the nature of new entrants, and alters the transmission of the shock through the extensive margin.

Colciago, A., & Silvestrini, R. (2022). Monetary policy, productivity, and market concentration. EUROPEAN ECONOMIC REVIEW, 142 [10.1016/j.euroecorev.2021.103999].

Monetary policy, productivity, and market concentration

Colciago A.
Primo
;
2022

Abstract

We identify a new channel through which monetary policy affects productivity at business cycle frequencies. An unexpected monetary easing initially reduces average labor productivity, which then overshoots its pre-shock level. At the same time, the firm entry rate rises in response to the shock and then undershoots. Market concentration matters for the monetary transmission mechanism. In low concentrated markets, the policy shock has a negligible effect on productivity, while a sizeable one on entry. To rationalize these empirical findings, we build a New Keynesian model where the pool of heterogeneous producers is endogenous. By reducing borrowing costs and stimulating demand, a monetary easing attracts low productivity firms to the market, inducing a reduction in average productivity. However, after few periods, the resulting increase in competition cleanses the market of unproductive firms, leading to a productivity overshooting together with an undershooting of the entry rate. Market concentration affects the nature of new entrants, and alters the transmission of the shock through the extensive margin.
Si
Articolo in rivista - Articolo scientifico
Scientifica
Concentration; Firm entry; Firm heterogeneity; Monetary policy; Productivity;
English
Colciago, A., & Silvestrini, R. (2022). Monetary policy, productivity, and market concentration. EUROPEAN ECONOMIC REVIEW, 142 [10.1016/j.euroecorev.2021.103999].
Colciago, A; Silvestrini, R
File in questo prodotto:
File Dimensione Formato  
published_EER.pdf

Solo gestori archivio

Tipologia di allegato: Publisher’s Version (Version of Record, VoR)
Dimensione 1.97 MB
Formato Adobe PDF
1.97 MB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10281/354384
Citazioni
  • Scopus 0
  • ???jsp.display-item.citation.isi??? 0
Social impact