^*William C. Dunkelberg is the Chief Economist of the National Federation of Independent Business and professor of economics and former Dean, School of Business and Management, Temple University. Dr. Dunkelberg is also Chair of the Global Interdependence Center and Chairman of the Board of Liberty Bell Bank. He received BA, MA, and Ph.D. degrees in economics from the University of Michigan and has served on the faculties of the University of Michigan, Stanford University, and Purdue University. He also served as Study Director at the Survey Research Center, with responsibility for the Survey of Consumer Finances. Jonathan A. Scott is an associate professor of finance at the Fox School of Business at Temple University and an adjunct scholar with the National Federation of Independent Business Research Foundation. He is currently the interim director of the Fox School Honors program and managing director of the Fox School's student managed investment fund. His research focuses on small business access to credit markets, with publications in a number of financial and small business journals. Prior to joining Temple, he was a senior financial executive at the Federal Home Loan Bank of Dallas during the thrift crisis in the mid- to late 1980s. He received his BA in economics from the University of Cincinnati and his MS and Ph.D. in economics from Purdue University.

Abstract

The small business sector of the economy accounts for half of private gross domestic product and well over half of private sector employment. Little is known about how these firms and the banks that serve them are affected by changes in monetary policy. Using data from the monthly surveys of the members of the National Federation of Independent Business, the impact of unexpected (between meeting) Federal Reserve announcements on owner expectations and hiring and spending plans are examined. Using interviews filled out during the month, "before" and "after" groups are analyzed to assess the impact of Federal Reserve announcements on firm behavior. Narrowing the analysis period to just days before and after Federal Reserve announcements permits the assessment of owner responses uncontaminated by other events. Changes in owner expectations and spending and hiring plans are shown to be translated into subsequent changes in actual spending and hiring that are often the opposite of what is suggested by conventional economic theory. Firms that do not use debt respond in the same way as those regularly active in credit markets. The results provide additional insight and richness to our understanding of the transmission channels through which monetary policy impacts the real economy.