BdE Working Papers No 2302 Latest version
This paper explores the impact of monetary policy on capital misallocation through its heterogeneous effects on firms. Using Spanish firm-level data covering 1999-2019, we show that an expansionary monetary policy shock leads to a decrease in capital misallocation measured as the within-industry dispersion of firm’s marginal revenue product of capital (MRPK). To analyse the mechanism behind this finding, we first explore the intensive margin and show that high-MRPK firms increase their investment and their debt financing relatively more than low-MRPK firms after monetary policy easing. We also document that firm’s MRPK is a much stronger driver of its investment sensitivity to monetary policy than its age, leverage, or cash. These findings point at MRPK as a good proxy for financial frictions. Second, we explore the extensive margin and show that monetary policy easing increases entry and decreases exit, although the effect is quantitatively small, and it does not lead to significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, the evidence points to expansionary monetary policy decreasing capital misallocation mainly through the relaxation of financial frictions of incumbent productive and constrained firms.