Monetary Transmission Mechanism with Firm Turnover
33 Pages Posted: 26 Aug 2016
Date Written: August 26, 2016
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: Suggested Citation