Monetary policy, productivity, and market concentration

We identify a new channel through which monetary policy affects productivity at business cycle frequencies. An unexpected easing initially reduces average labor productivity, then overshoots its pre-shock level. At the same time, firm entry rate rises in response to shock and undershoots. Market concentration matters for transmission mechanism. In low concentrated markets, has negligible effect on while sizeable one entry. To rationalize these empirical findings, we build New Keynesian model where pool of heterogeneous producers is endogenous. By reducing borrowing costs stimulating demand, attracts firms market, inducing reduction productivity. However, after few periods, resulting increase competition cleanses market unproductive firms, leading overshooting together with an undershooting rate. nature entrants, alters extensive margin.