Summary.
In this paper we develop a general equilibrium model with heterogeneous, long-lived firms where financial factors play an important role in their production and investment decisions. When the economy is hit by monetary shocks, the response of small and large firms differs substantially, with small firms responding more than big firms. As a result of the financial decisions of firms, monetary shocks have a persistent impact on output. Another finding of the paper is that monetary shocks lead to considerable volatility in stock market returns.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Author information
Authors and Affiliations
Corresponding author
Additional information
Received: 20 November 2003, Revised: 26 August 2004
JEL Classification Numbers:
E5, G3.
T.F. Cooley, V. Quadrini: We have received helpful comments on earlier versions of this paper from Jeff Campbell, David Chapman, Thomas Cosimano, Joao Gomes, Boyan Jovanovic, José-Víctor Ríos-Rull, and Harald Uhlig.
Correspondence to: V. Quadrini
Rights and permissions
About this article
Cite this article
Cooley, T.F., Quadrini, V. Monetary policy and the financial decisions of firms. Economic Theory 27, 243–270 (2006). https://doi.org/10.1007/s00199-004-0553-x
Issue Date:
DOI: https://doi.org/10.1007/s00199-004-0553-x