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RWP 21-06, August 2021

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.

JEL classifications: E22, E32, E52

Article Citation

  • Howes, Cooper. 2021. “Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment.” Federal Reserve Bank of Kansas City, Research Working Paper no. 21-06, August. Available at External Link