Young Firms and Monetary Policy Transmission

62 Pages Posted: 8 Dec 2020 Last revised: 3 Feb 2021

See all articles by Marco Casiraghi

Marco Casiraghi

Bank of Italy; International Monetary Fund (IMF) - International Capital Markets Department

Thomas McGregor

International Monetary Fund (IMF)

Berardino Palazzo

Board of Governors of the Federal Reserve System

Date Written: January 15, 2021

Abstract

We investigate the role of business dynamism in the transmission of monetary policy by exploit- ing the variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions that rationalizes the empirical evidence.

Keywords: firm demographics, business dynamism, monetary policy, local projections, U.S. states.

JEL Classification: E52, J11, M13

Suggested Citation

Casiraghi, Marco and Casiraghi, Marco and McGregor, Thomas and Palazzo, Berardino, Young Firms and Monetary Policy Transmission (January 15, 2021). Available at SSRN: https://ssrn.com/abstract=3732896 or http://dx.doi.org/10.2139/ssrn.3732896

Marco Casiraghi

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Thomas McGregor

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Berardino Palazzo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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