Monetary Policy and Firm-Level Productivity: Financial Frictions, Theory and Causal Evidence

Summary

We study how monetary policy affects firm-level total factor productivity in the presence of financial frictions using a panel of Austrian non-financial firms. A dynamic firm model and causal empirical framework show that tighter monetary policy reduces productivity-enhancing investment and firm-level TFP. The effects are stronger for highly leveraged firms and are more pronounced for persistent changes in financing conditions than for transitory highfrequency policy surprises.

Highlights

Monetary tightening lowers firm productivity
Monetary tightening lowers total factor productivity, consistent with higher financing costs reducing firms’ ability to undertake productivity-enhancing investment.

Persistent financing conditions matter most
Monetary tightening lowers total factor productivity, consistent with higher financing costs reducing firms’ ability to undertake productivity-enhancing investment.

Financial frictions amplify transmission
Highly leveraged firms experience stronger productivity losses following monetary tightening. At the aggregate level, improvements in average firm productivity are partly offset by declining allocative efficiency.