Monetary transmission mechanism with firm turnover

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. (C) 2016 Elsevier Inc. All rights reserved.