Can Monetary Policy Delay the Reallocation of Capital?

Fabian Schnell ()

No 1329, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: This paper examines the medium-run effects of monetary policy and focuses its analyses on the consequences of distorted (in the sense of exogenously influenced) real interest rates that are currently observed in many industrialized countries. In our model, real interest rates that are too low hinder economic recovery because such rates allow relatively unproductive firms to remain in the market. Monetary policy should increase interest rates after a negative macroeconomic shock to force a reallocation of production factors to more productive firms. We show that there is a trade-off between the short-run and medium-run preferences of the central bank as a consequence. From a welfare perspective, the impact of monetary policy depends on the long-run interest rate relative to the welfare-maximizing interest rate because of the preference for variety in the model.

Keywords: Monetary Policy Design; Reallocation of Capital; Structural Change; Heterogeneous Firms (search for similar items in EconPapers)
JEL-codes: E32 E43 E50 E52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2013:29

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