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Entrepreneurial finance and monetary policy

Author

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  • Jackson, Paul
  • Madison, Florian

Abstract

We model entrepreneurial finance in a search-theoretic framework with endogenous firm entry and exit. Entrepreneurs fund risky investments using a combination of savings, credit cards, bank loans, and home equity loans. The banking sector is over-the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, relating the transmission channel of monetary policy to output risk, financial frictions, and the housing market. Firm entry and exit generate heterogeneity in two dimensions: firm age and firm size. At a given nominal interest rate, new (mature) entrepreneurs finance a smaller (larger) share of investments internally and are more (less) liquidity constrained. A calibration to the U.S. between 2000–2016 complements the theoretical results and identifies the entry margin as a key driver in the transmission of monetary policy to aggregate output.

Suggested Citation

  • Jackson, Paul & Madison, Florian, 2022. "Entrepreneurial finance and monetary policy," European Economic Review, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002488
    DOI: 10.1016/j.euroecorev.2021.103961
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    References listed on IDEAS

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    More about this item

    Keywords

    Entrepreneurial finance; Money; Housing; Collateral; Monetary policy;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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