Firm Dynamics, Inflation, and the Transmission of Monetary Policy

William L. Gamber
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William L. Gamber: https://www.federalreserve.gov/econres/william-l-gamber.htm

No 2026-003, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: I study how fluctuations in business formation and destruction affect inflation and the transmission of monetary policy. To do this analysis, I extend a New Keynesian model to include endogenous business formation and destruction and heterogeneous producers. A decline in the number of producers puts upward pressure on inflation, and I find that this mechanism can explain about half of the missing deflation following the Great Recession. I then study the transmission of monetary policy in this framework. I show that endogenous fluctuations in entry generate an intertemporal trade-off in monetary policy; a contractionary shock leads employment and inflation to decline on impact, but inflation later overshoots, as the shock also causes a decline in entry and an increase in exit.

Keywords: Dynamic stochastic general equilibrium (DSGE) models; Monetary policy transmission; Business formation (search for similar items in EconPapers)
JEL-codes: E52 L11 (search for similar items in EconPapers)
Pages: 44 p.
Date: 2026-01-08
New Economics Papers: this item is included in nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:102373

DOI: 10.17016/FEDS.2026.003

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