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Monetary policy and the financial decisions of firms

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  • Thomas Cooley

    ()

  • Vincenzo Quadrini

    ()

Abstract

In this paper we develop a general equilibrium model with heterogeneous, long-lived firms where financial factors play an important role in their production and investment decisions. When the economy is hit by monetary shocks, the response of small and large firms differs substantially, with small firms responding more than big firms. As a result of the financial decisions of firms, monetary shocks have a persistent impact on output. Another finding of the paper is that monetary shocks lead to considerable volatility in stock market returns. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-004-0553-x
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 1 (01)
Pages: 243-270

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Handle: RePEc:spr:joecth:v:27:y:2006:i:1:p:243-270

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Related research

Keywords: Monetary policy; Firm financing; Propagation mechanism.;

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  1. Advanced Monetary Theory and Policy (ECON 447)

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