Banco de España Working Paper 2302 IMF Working Paper 24/121 Latest version
This paper explores the impact of monetary policy on capital misallocation through its heterogeneous effects on firms. Using the panel of the quasi-universe of Spanish firms from 2002 to 2019, we show that expansionary monetary policy shocks reduce capital misallocation, as measured by within-industry dispersion in the marginal revenue product of capital (MRPK). We explore the underlying mechanisms and find that high-MRPK firms respond more strongly to monetary easing, increasing both investment and debt. Moreover, MRPK outperforms conventional proxies such as age, leverage, or liquidity in explaining investment sensitivity to monetary policy. We find this evidence to be indicative of MRPK as a valid proxy for financial frictions. On the extensive margin, monetary easing modestly boosts firm entry and reduces exit in the short run, but without altering the MRPK composition of entrants and exiters. Overall, our results suggest that expansionary monetary policy improves capital allocation mainly through the intensive margin, by relaxing financial constraints of productive but constrained firms.