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    Monetary policy, firm heterogeneity, and product variety

    Hamano, M. and Zanetti, F. (2020) Monetary policy, firm heterogeneity, and product variety. Working Paper. Birkbeck Centre for Applied Macroeconomics, London, UK.

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    This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy.


    Item Type: Monograph (Working Paper)
    Additional Information: ISSN for the BCAM Working Paper series: 1745-8587
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Isobel Edwards
    Date Deposited: 20 Oct 2020 13:44
    Last Modified: 02 Aug 2023 18:04


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