Entrepreneurial Business Creation Response to Monetary Policy

Faculty Mentor(s)

Dr. John Lunn, Hope College

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Recent peaks in the unemployment rate are cause for concern, with annual unemployment rates in the United States approaching ten percent, creating a trend of the lowest employment rates since the Great Depression. Finding ways to increase the number of entrepreneurs and thus the creation of new businesses would allow for sustainable job creation and could jump-start the struggling economy. One such option to solve these economic struggles is to spur an increase in the number of businesses; something which requires investigation into the behavior of entrepreneurs. This study attempts to examine the response of entrepreneurs in relation to changes in the monetary policy. Regression analysis is used to determine the effect of the interest rate upon the start-up rate of businesses in the United States. The expectation was that a lower prime rate would in-turn increase the incentives of borrowing capital, and thus would increase the likelihood of business creation. The results of this study show no clear relationship between the current year’s prime rate and the start-up rate. However, when looking at specific sectors of industry, there are several significant, although small, negative relationships between the prime rate and the business start-up rate. Additionally, there was a particularly strong inverse relationship between the previous year’s prime rate and the overall business start-up rate.

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