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Monetary Policy Uncertainty and Firm Dynamics

Author

Listed:
  • Stefano Fasani

    (Queen Mary University London)

  • Haroon Mumtaz

    (Queen Mary University London)

  • Lorenza Rossi

    (University of Pavia)

Abstract
This paper uses a FAVAR model with external instruments to show that the policy uncertainty shocks are recessionary and are associated with an increase in the exit of firms and a decrease in entry and in the stock price with total factor productivity rising in the medium run. To explain this result, we build scale DSGE module featuring firm heterogeneity and endogenous firm entry and exit. These features are crucial in matching the empirical responses. Versions of the model with constant firms or constant firms' exit are unable to re-produce the FAVAR response of firm' entry and exit and suggest a much smaller effect of this shock on real activity.

Suggested Citation

  • Stefano Fasani & Haroon Mumtaz & Lorenza Rossi, 2020. "Monetary Policy Uncertainty and Firm Dynamics," Working Papers 903, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:903
    as

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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2020/wp903.pdf
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    References listed on IDEAS

    as
    1. Toshihiko Mukoyama & Yoonsoo Lee, 2008. "Entry, Exit, and Plant-level Dynamics over the Business Cycle," 2008 Meeting Papers 454, Society for Economic Dynamics.
    2. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    3. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    4. repec:ulb:ulbeco:2013/13388 is not listed on IDEAS
    5. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    6. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    7. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    8. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Dudley Cooke & Tatiana Damjanovic, 2021. "Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry," Working Papers 2021_02, Durham University Business School.

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    More about this item

    Keywords

    Monetary policy uncertainty shocks; FAVAR; DSGE;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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