European Business Schools Librarian's Group
Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics
No 326: The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics
Lea Steininger () and Jan Philipp Fritsche ()
Additional contact information
Lea Steininger: Department of Economics, Vienna University of Economics and Business
Jan Philipp Fritsche: Humboldt University of Berlin, German Institute for Economic Research
Abstract: We study the role of firm heterogeneity and cost structure in determining the transmission of monetary policy. Using local projections and high dimensional fixed effects, we show that a one standard deviation contractionary monetary policy shock decreases firms' labor share by 0.4 percent, on average. However, reactions are heterogeneous along two dimensions: The labor share is most informative to discriminate firms by their response in payroll expenses, firms' leverage is most informative to discriminate by their response in value added. We interpret these findings by theorizing differential effects of factor input costs. Our results inform the policy debate on transmission and redistribution effects of monetary policy, and suggest that the effectiveness of monetary policy may depend on the labor intensity of production.
Keywords: Monetary policy, firm heterogeneity, labor share, production dynamics, factor input costs
JEL-codes: D22; E52; D31; E23; E32 July 2022
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