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Monetary policy, firm exit and productivity

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  • Hartwig, Benny
  • Lieberknecht, Philipp

Abstract

We analyze the influence of monetary policy on firms' extensive margin and productivity. Our empirical evidence for the U.S. based on a macro-financial SVAR suggests that expansionary monetary policy shocks stimulate corporate profits, reduce firm exit and increase firm entry. In the medium run, exit overshoots the baseline. We rationalize these findings in a general equilibrium model featuring endogenous entry and exit. In the model, expansionary monetary policy shocks increase firm profits by stimulating aggregate demand and thereby allow less productive firms to remain in the market. As the monetary stimulus fades, these lessproductive firms become unprofitable such that exit overshoots. This exit channel of monetary policy implies a flatter aggregate supply curve and therefore amplifies output responses, but dampens inflationary effects.

Suggested Citation

  • Hartwig, Benny & Lieberknecht, Philipp, 2020. "Monetary policy, firm exit and productivity," Discussion Papers 61/2020, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:612020
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    More about this item

    Keywords

    firm exit; firm entry; extensive margin; corporate profits; monetarypolicy;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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