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The Response of Small Business Owners to Changes in Monetary Policy

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  • William C Dunkelberg
  • Jonathan A Scott

Abstract

The small business sector of the economy accounts for half of private gross domestic product and well over half of private sector employment. Little is known about how these firms and the banks that serve them are affected by changes in monetary policy. Using data from the monthly surveys of the members of the National Federation of Independent Business, the impact of unexpected (between meeting) Federal Reserve announcements on owner expectations and hiring and spending plans are examined. Using interviews filled out during the month, “before” and “after” groups are analyzed to assess the impact of Federal Reserve announcements on firm behavior. Narrowing the analysis period to just days before and after Federal Reserve announcements permits the assessment of owner responses uncontaminated by other events. Changes in owner expectations and spending and hiring plans are shown to be translated into subsequent changes in actual spending and hiring that are often the opposite of what is suggested by conventional economic theory. Firms that do not use debt respond in the same way as those regularly active in credit markets. The results provide additional insight and richness to our understanding of the transmission channels through which monetary policy impacts the real economy.Business Economics (2009) 44, 23–37. doi:10.1057/be.2008.6

Suggested Citation

  • William C Dunkelberg & Jonathan A Scott, 2009. "The Response of Small Business Owners to Changes in Monetary Policy," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 44(1), pages 23-37, January.
    • Handle: RePEc:pal:buseco:v:44:y:2009:i:1:p:23-37
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    Cited by:

    1. Ferrando, Annalisa & Popov, Alexander & Udell, Gregory F., 2022. "Unconventional monetary policy, funding expectations, and firm decisions," European Economic Review, Elsevier, vol. 149(C).
    2. Ferrando, Annalisa & Ganoulis, Ioannis & Preuss, Carsten, 2019. "Firms’ expectations on the availability of credit since the financial crisis," Working Paper Series 2341, European Central Bank.
    3. Balke Nathan S. & Zeng Zheng, 2013. "Credit demand, credit supply, and economic activity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-38, October.

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