7/2016 Lenno Uusküla. Monetary transmission mechanism with firm turnover

Working Papers of Eesti Pank 7/2016

An expansionary monetary policy shock increases the entry rate and the number of firms in the US. A pure sticky price model predicts that the number of firms in the economy should go down after a monetary expansion, but this prediction is at
odds with the empirical findings. In marked contrast, the cost channel mechanism generates an increase in the number of firms that is consistent with the data. A key insight is that the greater price stickiness is, the stronger the cost channel needs to
be to generate firm dynamics that are consistent with the data.

JEL classification: E32, C32

DOI: 10.23656/25045520/72016/0003

Keywords: monetary transmission, cost channel, sticky prices, firm turnover

Author’s e-mail address: lenno.uuskyla [at] eestipank.ee

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The views expressed are those of the authors, and do not necessarily represent the official views of the Bank of Estonia or the Eurosystem.