Working Paper

Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

Abstract: While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of U.S. manufacturing firms, I show this increase is driven by the types of firms that are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back.

Keywords: Monetary Policy; Investments; Financial Frictions;

JEL Classification: E22; E32; E52;

https://doi.org/10.18651/RWP2021-06

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2021-08-27

Number: RWP 21-06