Financing of Firms,Labor Reallocation,and the Distributional Role of Monetary Policy*

We analyze monetary policy in a model with heterogeneous firms, where constrained firms finance operations through external financing and unconstrained firms use internal funds. We show that expansionary monetary policy increases the relative employment of constrained firms, while positive productivity shocks increase that of unconstrained firms. Our results agree with recent empirical findings, emphasizing the role of the monetary authority in reallocating resources across sectors with different financing capabilities. We also show that if the relative productivity of constrained firms is low, then expansionary monetary policy tilts resources towards less productive firms, which decreases the effectiveness of the policy in stimulating aggregate output.