Monetary policy and productivity

Relying on local projection methods and a large cross-country firm-level dataset, we provide a comprehensive assessment of how monetary policy shocks affect productivity dynamics. We find significant effects operating both through changes in firm-level productivity growth and through the reallocation of resources across firms. A 25-basis-point tightening reduces, while an equivalent easing raises, within-firm productivity growth by about 0.7 percentage points over five years, with the credit and cost channels playing the dominant role. These effects are amplified when financial development is weak or during economic downturns. On the reallocation side, easing episodes increase labour misallocation by up to 7% over three years, partly by channelling resources toward zombie firms, with the impact strongest under low financial development, high barriers to competition, or during economic upturns, whereas monetary tightening does not, on average, significantly affect allocative efficiency.