Monetary Transmission Mechanism with Firm Turnover

33 Pages Posted: 26 Aug 2016

Date Written: August 26, 2016

Abstract

An expansionary monetary policy shock increases the entry rate and the number of firms in the US. A pure sticky price model predicts that the number of firms in the economy should go down after a monetary expansion, but this prediction is at odds with the empirical findings. In marked contrast, the cost channel mechanism generates an increase in the number of firms that is consistent with the data. A key insight is that the greater price stickiness is, the stronger the cost channel needs to be to generate firm dynamics that are consistent with the data.

Keywords: monetary transmission, cost channel, sticky prices, firm turnover

JEL Classification: E32, C32

Suggested Citation

Uusküla, Lenno, Monetary Transmission Mechanism with Firm Turnover (August 26, 2016). Available at SSRN: https://ssrn.com/abstract=2830423 or http://dx.doi.org/10.2139/ssrn.2830423

Lenno Uusküla (Contact Author)

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

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