Entrepreneurial finance and monetary policy

Paul Jackson and Florian Madison

European Economic Review, 2022, vol. 141, issue C

Abstract: We model entrepreneurial finance in a search-theoretic framework with endogenous firm entry and exit. Entrepreneurs fund risky investments using a combination of savings, credit cards, bank loans, and home equity loans. The banking sector is over-the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, relating the transmission channel of monetary policy to output risk, financial frictions, and the housing market. Firm entry and exit generate heterogeneity in two dimensions: firm age and firm size. At a given nominal interest rate, new (mature) entrepreneurs finance a smaller (larger) share of investments internally and are more (less) liquidity constrained. A calibration to the U.S. between 2000–2016 complements the theoretical results and identifies the entry margin as a key driver in the transmission of monetary policy to aggregate output.

Keywords: Entrepreneurial finance; Money; Housing; Collateral; Monetary policy (search for similar items in EconPapers)
JEL-codes: E22 E40 E52 G31 R31 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002488

DOI: 10.1016/j.euroecorev.2021.103961

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