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 US manufacturing firms, I show this increase is driven by the types of firms which are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back. Removing firm financial constraints in the model dampens the response of manufacturing output to monetary shocks by about 25%.
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No rights reserved. This work was authored as part of the Contributor's official duties as an Employee of the United States Government and is therefore the work of the United States Government. In accordance with 17 U.S.C. 105, no copyright protection is available for such works under U.S. law.
2023
No rights reserved. This work was authored as part of the Contributor's official duties as an Employee of the United States Government and is therefore the work of the United States Government. In accordance with 17 U.S.C. 105, no copyright protection is available for such works under U.S. law.
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