University of Oulu

The effects of firm entry and exit on macroeconomic fluctuations and monetary policy

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Author: Vilmi, Lauri1
Organizations: 1University of Oulu, Oulu Business School, Department of Economics
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1 MB)
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Language: English
Published: 2009
Publish Date: 2009-09-08


This paper studies how endogenous firm entry affects the responses of the economy to the monetary policy, cost-push and demand shocks. Opposite to the earlier literature we assume also that firm default rate is not constant but subject to exogenous shocks. We show that increased bankruptcies have long-standing negative effect on output and positive effect on inflation. This raises the question how monetary policy should react to the variability in business defaults. Based on our simulations we propose two alternative monetary policy rules, which give lower variance than the traditional Taylor rule which reacts to inflation and consumption.

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Series: University of Oulu, Department of Economics, Working papers
Issue: 904
Copyright information: © University of Oulu, 2009. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.