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.
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Provider: Federal Reserve Bank of Kansas City
Part of Series: Research Working Paper
Publication Date: 2021-08-27
Number: RWP 21-06