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Monetary transmission mechanism with firm turnover

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  • Lenno Uuskula

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Abstract

An expansionary monetary policy shock increases the entry rate and the number of firms in the US. A pure sticky price model predicts that the number of firms in the economy should go down after a monetary expansion, but this prediction is at odds with the empirical findings. In marked contrast, the cost channel mechanism generates an increase in the number of firms that is consistent with the data. A key insight is that the greater price stickiness is, the stronger the cost channel needs to be to generate firm dynamics that are consistent with the data.

Suggested Citation

  • Lenno Uuskula, 2016. "Monetary transmission mechanism with firm turnover," Bank of Estonia Working Papers wp2016-7, Bank of Estonia, revised 10 Oct 2016.
  • Handle: RePEc:eea:boewps:wp2016-7
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    More about this item

    Keywords

    monetary transmission; cost channel; sticky prices; firm turnover;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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