Reallocation Effects of Monetary Policy

Author Name MIYAKAWA Daisuke (Hitotsubashi University) / OIKAWA Koki (Waseda University) / UEDA Kozo (Waseda University)
Creation Date/NO. August 2018 18-E-056
Research Project Microeconometric Analysis of Firm and Industry Growth
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First draft: August 2018
Revised: May 2020


Responding to the increased attention on the distributional aspects of monetary policy, we investigate the reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms invest more in R&D and grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into R&D-driven endogenous growth with heterogeneous firms. The model shows that high nominal growth leads to an increase in the market share of innovative firms because menu-cost burdens are relatively heavier for less innovative firms. This reallocation effect 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. Moreover, the presence of menu costs can improve welfare.

Published: Miyakawa, Daisuke, Koki Oikawa, and Kozo Ueda, 2022. "Reallocation effects of monetary policy," International Economic Review, Volume63, Issue2 (2022), 947-975.