Monetary policy uncertainty and firm dynamics

Fasani, Stefano and Mumtaz, Haroon and Rossi, Lorenza (2022) Monetary policy uncertainty and firm dynamics. Review of Economic Dynamics. ISSN 1094-2025 (In Press)

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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.

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Journal Article
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Review of Economic Dynamics
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Deposited On:
10 May 2022 15:30
In Press
Last Modified:
10 May 2022 22:30