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Monetary Policy, Firms’ Extensive Margin, and Productivity

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  • Benny Hartwig

    (Deutsche Bundesbank)

  • Philipp Lieberknecht

    (Deutsche Bundesbank)

Abstract

This paper explores the effect of conventional monetary policy on aggregate productivity through firms’ decisions to enter into or exit production. In a general equilibrium model with heterogeneous firms, we show that a monetary easing lowers productivity if it raises corporate profits: a rise in profitability allows low-productivity incumbents to remain active and unproductive new firms to enter production. Empirically, we find that expansionary monetary policy indeed raises profits, reduces firm exit, and increases entry. However, we do not find compelling evidence of an associated fall in aggregate productivity. Productivity decreases for small firms only. Entry and exit of unproductive firms induced by monetary policy hence appear of less quantitative importance for aggregate productivity than the theory suggests.

Suggested Citation

  • Benny Hartwig & Philipp Lieberknecht, 2025. "Monetary Policy, Firms’ Extensive Margin, and Productivity," International Journal of Central Banking, International Journal of Central Banking, vol. 21(1), pages 1-81, January.
    • Handle: RePEc:ijc:ijcjou:y:2025:q:1:a:1
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    References listed on IDEAS

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