Limited participation or sticky prices? New evidence from firm entry and failures

Lenno Uusküla ()

No 2008-07, Bank of Estonia Working Papers from Bank of Estonia

Abstract: Traditional models of monetary transmission such as sticky price and limited participation abstract from firm creation and destruction. Only a few papers look at the empirical effects of the monetary shock on the firm turnover measures. But what can we learn about monetary transmission by including measures for firm turnover into the theoretical and empirical models? Based on a large scale vector autoregressive (VAR) model for the U.S. economy I show that a contractionary monetary policy shock increases the number of business bankruptcy filings and failures, and decreases the creation of firms and net entry. According to the limited participation model, a contractionary monetary shock leads to a drop in the number of firms. On the contrary the same shock in the sticky price model increases the number of firms. Therefore the empirical findings support more the limited participation type of the monetary transmission

Keywords: monetary transmission; limited participation; sticky prices; firm entry; firm bankruptcy; structural VAR (search for similar items in EconPapers)
JEL-codes: E32 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-ent, nep-mac and nep-mon
Date: 2008-12-02, Revised 2008-12-02
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