The Exit Channel of Monetary Policy

Abstract

Monetary tightening can generate inefficient firm exits, by exacerbating firm illiquidity constraints. Contrary to the common belief that only small firms are affected, new evidence shows that large firms are vulnerable too, leading to large aggregate effects. This paper investigates why monetary tightening causes large firms to exit and explores the macroeconomic implications. To do so, we develop a model of endogenous firm exit with financial frictions and partial irreversibility. Financial frictions imply that only productive firms are able to take on debt, making them highly exposed to interest rate changes, as partial irreversibility makes deleveraging costly. The quality of firm selection can therefore endogenously worsen during monetary tightening episodes, highlighting a potential need for support for large firms in distress.

Work in progress.

Citation

@techreport{BocquetElinaHuleux2025,
author = {Léonard Bocquet and Eustache Elina and Raphaël Huleux},
year = {2025},
title = {The Exit Channel of Monetary Policy}}