Monetary Policy and Firm Dynamics

Stefano Fasani, Haroon Mumtaz and Lorenza Rossi

Review of Economic Dynamics, 2023, vol. 47, 278-296

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)

Keywords: Monetary policy uncertainty; Firm dynamics; FAVAR; DSGE (search for similar items in EconPapers)
JEL-codes: C5 E1 E5 E52 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.red.2022.02.002

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