European Economic Review, Volume 185, May 2026
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. Considering the intensive margin, we find that high-MRPK firms respond more strongly to monetary easing, increasing both investment and debt. Moreover, MRPK outperforms conventional proxies for financial frictions–such as firm age, leverage, or liquidity–in explaining the sensitivity of investment to monetary policy, providing evidence that it captures these frictions more accurately. 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.