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Monetary Policy and Firm Dynamics

Author

Listed:
  • Stefano Fasani

    (Queen Mary University of London)

  • Haroon Mumtaz

    (Queen Mary University of London)

  • Lorenza Rossi

    (University of Pavia)

Abstract
This paper uses a FAVAR model with external instruments to show that monetary policy uncertainty shocks are recessionary and are associated with an increase in firms' exit and a decrease in firms' entry. At the same time, the stock price declines, while the TFP increases in the medium run. To explain this result, we build up and estimate a medium-scale DSGE model featuring firm heterogeneity and endogenous firm entry and exit. These features are crucial in matching the empirical responses. The baseline model outperforms an alternative model without firm dynamics in reproducing the FAVAR responses and implies a larger effect of monetary policy uncertainty shock on the real economic activity. (Copyright: Elsevier)

Suggested Citation

  • Stefano Fasani & Haroon Mumtaz & Lorenza Rossi, 2023. "Monetary Policy and Firm Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 278-296, January.
    • Handle: RePEc:red:issued:21-105
    DOI: 10.1016/j.red.2022.02.002
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    More about this item

    Keywords

    Monetary policy uncertainty; Firm dynamics; FAVAR; DSGE;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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