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Monetary Policy and Firm Dynamics

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  • Matthew Read

Abstract

Do firm dynamics matter for the transmission of monetary policy? Empirically, the startup rate declines following a monetary contraction, while the exit rate increases, both of which reduce aggregate employment. I present a model that combines firm dynamics in the spirit of Hopenhayn (1992) with New-Keynesian frictions and calibrate it to match cross-sectional evidence. The model can qualitatively account for the responses of entry and exit rates to a monetary policy shock. However, the responses of macroeconomic variables closely resemble those in a representative-firm model. I discuss the equilibrium forces underlying this approximate equivalence, and what may overturn this result.

Suggested Citation

  • Matthew Read, 2020. "Monetary Policy and Firm Dynamics," Papers 2011.03514, arXiv.org.
    • Handle: RePEc:arx:papers:2011.03514
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    References listed on IDEAS

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