Arbeitspapier

Risk-taking, capital allocation and optimal monetary policy

We study the role of firm heterogeneity in affecting business cycle dynamics and optimal stabilization policy. Firms differ in their degree of cyclicality, and hence, exposure to aggregate risk, leading to firm-specific risk premia that influence resource allocations. The heterogeneous firm economy can be recast in a representative firm formulation, but where total factor productivity (TFP) is endogenous and depends on the resource allocation. The model uncovers a novel tradeoff between the long-run level and volatility of TFP. Inefficiencies distort this tradeoff and result in either excessive volatility or depressed output, implying a role for corrective policy. Embedding this mechanism into a workhorse New Keynesian model, we show that allocational considerations can strengthen the incentives for leaning against the wind, i.e., optimal policy is more strongly countercyclical than in an observationally equivalent economy that abstracts from heterogeneity. A quantitative exercise suggests that the losses from ignoring heterogeneity can be substantial, which stem largely from a less productive allocation of resources and so depressed TFP and output.

Sprache
Englisch

Erschienen in
Series: Working Paper ; No. 2021-01

Klassifikation
Wirtschaft
Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
Macroeconomics: Production
Business Fluctuations; Cycles
Financial Markets and the Macroeconomy
Monetary Policy
Fiscal Policy
Thema
monetary policy
heterogeneous firms
misallocation
productivity

Ereignis
Geistige Schöpfung
(wer)
David, Joel M.
Zeke, David
Ereignis
Veröffentlichung
(wer)
Federal Reserve Bank of Chicago
(wo)
Chicago, IL
(wann)
2021

DOI
doi:10.21033/wp-2021-01
Handle
Letzte Aktualisierung
10.03.2025, 11:43 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • David, Joel M.
  • Zeke, David
  • Federal Reserve Bank of Chicago

Entstanden

  • 2021

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