Chapter 1: Traditional models of monetary transmission such as sticky price and limited partic- ipation abstract from firm creation and destruction. Only a few papers look at the empirical effects of the monetary shock on the firm turnover measures. But what can we learn about monetary transmission by including measures for firm turnover into the theoretical and empirical models? Based on a large scale vector autore- gressive (VAR) model for the U.S. economy I show that a contractionary monetary policy shock increases the number of business bankruptcy filings and failures, and decreases the creation of firms and net entry. According to the limited participation model, a contractionary monetary shock leads to a drop in the number of firms. On the contrary the same shock in the sticky price model increases the number of firms. Therefore the empirical findings support more the limited participation type of monetary transmission.
Chapter 2: We introduce deep habits into a sticky-price sticky-wage economy and examine the resulting models ability to account for the impact of monetary policy shocks. The deep habits mechanism gives rise to countercyclical markup movements even when prices are flexible and interacts with nominal rigidities in interesting ways. Key parameters are estimated using a limited information approach. The deep habits model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for both the price puzzle and inflation persistence. A key insight is that the deep habits mechanism and nominal rigidities are comple- mentary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. The results are shown to be stable over time and not caused by monetary policy changes.
Chapter 3: In a standard New-Keynesian DSGE model exogenous price markup and cost-push shocks generate most of the volatility in inflation. The key equation determining inflation is the New Keynesian Phillips curve. Several authors have proposed mod- ifications to the forward looking Phillips curve. In this paper I concentrate on the effects of endogenous markups due to firm turnover and the importance of financial friction. My findings show that entry cost shocks are important in explaining the dynamics of inflation at the business cycle frequency. Financial friction does not change the relative importance of the structural shocks in explaining inflation.