Endogenous Productivity Dynamics in a Two-Sector Business Cycle Model

Fabio Massimo Piersanti and Patrizio Tirelli

No 434, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We develop a stylized two-sector business cycle model with endogenous firm dynamics in the investment goods sector. The positive correlation between firms profitability and the relative price of investment goods generates an endogenous persistence mechanism in productivity dynamics which drives the model response to shocks. A white noise permanent shock to the productivity of new entrants causes endogenous exit and subsequent rounds of productivity increases, due to the competitive pressure generated by falling relative prices of investment goods. The model internal propagation mechanism generates persistent dynamics and a large "multiplier effect" on the initial shock. Neutral productivity shocks affect long run firms productivity in the Investment-goods sector through their effect on relative prices. Firms productivity is also endogenous to shocks to the marginal efficiency of investment. The DSGE version of the model apparently survives the Barro-King curse.

Keywords: Productivity shocks; Investment shocks; relative price of investment; DSGE model; Firms entry; Firms exit (search for similar items in EconPapers)
JEL-codes: E13 E21 E22 E30 E32 (search for similar items in EconPapers)
Pages: 71
Date: 2020-02, Revised 2020-02
New Economics Papers: this item is included in nep-bec, nep-com, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:434

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