Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/red/sed019/128.html
   My bibliography  Save this paper

Reallocation Effects of Monetary Policy

Author

Listed:
  • Kozo Ueda

    (Waseda University)

Abstract
Central banks across the globe are paying increasing attention to the distributional aspects of monetary policy. In this study, we focus on reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms tend to grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into endogenous growth with heterogeneous firms. The model shows that, under a high nominal growth rate, firms of inferior quality bear a heavier burden of menu cost payments than do firms of superior quality. This outcome increases the market share of superior firms, while some inferior firms exit the market. This reallocation effect, if strong, yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity, whereas standard New Keynesian models often conclude that zero nominal growth is optimal. Moreover, the presence of menu costs can improve welfare.

Suggested Citation

  • Kozo Ueda, 2019. "Reallocation Effects of Monetary Policy," 2019 Meeting Papers 128, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:128
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_128.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    2. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    3. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    4. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    5. Daniel Garcia‐Macia & Chang‐Tai Hsieh & Peter J. Klenow, 2019. "How Destructive Is Innovation?," Econometrica, Econometric Society, vol. 87(5), pages 1507-1541, September.
    6. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    7. Robert E. Lucas Jr. & Benjamin Moll, 2014. "Knowledge Growth and the Allocation of Time," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 1-51.
    8. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1371-1406.
    9. Marvin Goodfriend & Robert G. King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296, National Bureau of Economic Research, Inc.
    10. Ariel Burstein & Christian Hellwig, 2008. "Welfare Costs of Inflation in a Menu Cost Model," American Economic Review, American Economic Association, vol. 98(2), pages 438-443, May.
    11. Arawatari, Ryo & Hori, Takeo & Mino, Kazuo, 2018. "On the nonlinear relationship between inflation and growth: A theoretical exposition," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 79-93.
    12. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 1-20.
    13. Rasmus Lentz & Dale T. Mortensen, 2005. "Productivity Growth And Worker Reallocation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 731-749, August.
    14. Daron Acemoglu & Ufuk Akcigit & Harun Alp & Nicholas Bloom & William Kerr, 2018. "Innovation, Reallocation, and Growth," American Economic Review, American Economic Association, vol. 108(11), pages 3450-3491, November.
    15. Malerba, Franco & Orsenigo, Luigi, 1999. "Technological entry, exit and survival: an empirical analysis of patent data," Research Policy, Elsevier, vol. 28(6), pages 643-660, August.
    16. Dan Cao & Erick Sager & Henry Hyatt & Toshihiko Mukoyama, 2019. "Firm Growth through New Establishments," 2019 Meeting Papers 1484, Society for Economic Dynamics.
    17. Argente, David & Lee, Munseob & Moreira, Sara, 2018. "Innovation and product reallocation in the great recession," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 1-20.
    18. Daisuke Miyakawa & Koki Oikawa & Kozo Ueda, 2022. "Reallocation Effects Of Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 947-975, May.
    19. Klaus Adam & Henning Weber, 2019. "Optimal Trend Inflation," American Economic Review, American Economic Association, vol. 109(2), pages 702-737, February.
    20. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2004. "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," IZA Discussion Papers 1374, Institute of Labor Economics (IZA).
    21. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    22. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant Size Distribution and Cross-Country Income Differences," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 243-272, National Bureau of Economic Research, Inc.
    23. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    24. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
    25. Markus Poschke, 2018. "The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 1-41, July.
    26. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115(2), pages 171-199.
    27. Rasmus Lentz & Dale T. Mortensen, 2008. "An Empirical Model of Growth Through Product Innovation," Econometrica, Econometric Society, vol. 76(6), pages 1317-1373, November.
    28. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
    29. Masahiro Higo & Yumi Saita, 2007. "Price Setting in Japan: Evidence from CPI Micro Data," Bank of Japan Working Paper Series 07-E-20, Bank of Japan.
    30. Enrico Santarelli & Luuk Klomp & A. Roy Thurik, 2006. "Gibrat’s Law: An Overview of the Empirical Literature," International Studies in Entrepreneurship, in: Enrico Santarelli (ed.), Entrepreneurship, Growth, and Innovation, chapter 0, pages 41-73, Springer.
    31. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1371-1406.
    32. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    33. Virgiliu Midrigan, 2011. "Menu Costs, Multiproduct Firms, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(4), pages 1139-1180, July.
    34. Nils M. Gornemann & Keith Kuester & Makoto Nakajima, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," International Finance Discussion Papers 1167, Board of Governors of the Federal Reserve System (U.S.).
    35. Caballero, Ricardo J & Hammour, Mohamad L, 1994. "The Cleansing Effect of Recessions," American Economic Review, American Economic Association, vol. 84(5), pages 1350-1368, December.
    36. Benjamin M. Friedman & Michael Woodford (ed.), 2010. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 3, number 3.
    37. Diego Restuccia & Richard Rogerson, 2013. "Misallocation and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 1-10, January.
    38. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    39. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1103-1144.
    40. Schmitt-Grohé, Stephanie & Uribe, Martín, 2010. "The Optimal Rate of Inflation," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 13, pages 653-722, Elsevier.
    41. James Tybout, 2014. "The Missing Middle: Correspondence," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 235-236, Fall.
    42. Enrico Santarelli (ed.), 2006. "Entrepreneurship, Growth, and Innovation," International Studies in Entrepreneurship, Springer, number 978-0-387-32314-5, December.
    43. Oikawa, Koki & Ueda, Kozo, 2018. "The optimal inflation rate under Schumpeterian growth," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 114-125.
    44. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    45. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(2), pages 287-303.
    46. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    47. Chang-Tai Hsieh & Peter J. Klenow, 2018. "The Reallocation Myth," Working Papers 18-19, Center for Economic Studies, U.S. Census Bureau.
    48. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    49. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 507-524, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matthias Meier & Timo Reinelt, 2024. "Monetary Policy, Markup Dispersion, and Aggregate TFP," The Review of Economics and Statistics, MIT Press, vol. 106(4), pages 1012-1027, July.
    2. Dudley Cooke & Tatiana Damjanovic, 2021. "Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry," Working Papers 2021_02, Durham University Business School.
    3. Hartwig, Benny & Lieberknecht, Philipp, 2020. "Monetary policy, firm exit and productivity," Discussion Papers 61/2020, Deutsche Bundesbank.
    4. Daisuke Miyakawa & Koki Oikawa & Kozo Ueda, 2022. "Reallocation Effects Of Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 947-975, May.
    5. Hamano, Masashige & Zanetti, Francesco, 2022. "Monetary policy, firm heterogeneity, and product variety," European Economic Review, Elsevier, vol. 144(C).
    6. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    7. FURUKAWA Yuichi & NIWA Sumiko, 2021. "Deflation and Declining Business Dynamism in a Cash-in-Advance Economy," Discussion papers 21058, Research Institute of Economy, Trade and Industry (RIETI).
    8. Donato Masciandaro & Francesco Passarelli, 2020. "Populism, Political Pressure and Central Bank (in)Dependence," Open Economies Review, Springer, vol. 31(3), pages 691-705, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Monetary Policy and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112177, University Library of Munich, Germany.
    2. Oikawa, Koki & Ueda, Kozo, 2018. "The optimal inflation rate under Schumpeterian growth," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 114-125.
    3. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    4. Oikawa, Koki & Ueda, Kozo, 2019. "Short- and long-run tradeoff of monetary easing," Journal of the Japanese and International Economies, Elsevier, vol. 52(C), pages 189-200.
    5. Klaus Adam & Henning Weber, 2023. "Estimating the Optimal Inflation Target from Trends in Relative Prices," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 1-42, July.
    6. Fontanelli, Luca & Guerini, Mattia & Napoletano, Mauro, 2023. "International trade and technological competition in markets with dynamic increasing returns," Journal of Economic Dynamics and Control, Elsevier, vol. 149(C).
    7. FURUKAWA Yuichi & NIWA Sumiko, 2021. "Deflation and Declining Business Dynamism in a Cash-in-Advance Economy," Discussion papers 21058, Research Institute of Economy, Trade and Industry (RIETI).
    8. Acemoglu, Daron & Cao, Dan, 2015. "Innovation by entrants and incumbents," Journal of Economic Theory, Elsevier, vol. 157(C), pages 255-294.
    9. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    10. Ufuk Akcigit & William R. Kerr, 2018. "Growth through Heterogeneous Innovations," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1374-1443.
    11. Laurent Cavenaile & Pau Roldan-Blanco, 2021. "Advertising, Innovation, and Economic Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 251-303, July.
    12. Jose Asturias & Sewon Hur & Timothy J. Kehoe & Kim J. Ruhl, 2023. "Firm Entry and Exit and Aggregate Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 48-105, January.
    13. Philippe Andrade & Jordi Gali & Herve Le Bihan & Julien Matheron, 2019. "The Optimal Inflation Target and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(2 (Fall)), pages 173-255.
    14. Ohki, Kazuyoshi, 2023. "Disruptive innovation by heterogeneous incumbents and economic growth: When do incumbents switch to new technology?," Journal of Mathematical Economics, Elsevier, vol. 107(C).
    15. Argente, David & Lee, Munseob & Moreira, Sara, 2018. "Innovation and product reallocation in the great recession," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 1-20.
    16. Ufuk Akcigit & William Kerr, 2015. "Growth through Heterogeneous Innovation, Second Version," PIER Working Paper Archive 15-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 25 Mar 2015.
    17. Maarten de Ridder, 2022. "Market power and innovation in the intangible economy," POID Working Papers 064, Centre for Economic Performance, LSE.
    18. Erzo G.J. Luttmer, 2010. "Models of Growth and Firm Heterogeneity," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 547-576, September.
    19. Klaus Adam & Henning Weber, 2019. "Optimal Trend Inflation," American Economic Review, American Economic Association, vol. 109(2), pages 702-737, February.
    20. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed019:128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.