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The extensive margin and US aggregate fluctuations: A quantitative assessment

Miguel Casares (), Hashmat Khan () and Jean-Christophe Poutineau

Journal of Economic Dynamics and Control, 2020, vol. 120, issue C

Abstract: We report empirical evidence indicating that US net business formation has recently turned more volatile, procyclical and persistent. To study these stylized facts, we estimate a DSGE model with endogenous entry and exit. Business units feature heterogeneous productivity and they shut down if the present value of expected future dividends falls below the current liquidation value. The model provides a better fit than a constant exit rate model with the fluctuations of US business formation. The introduction of the extensive margin amplifies the effects of technology and risk-premium shocks, and reduces the procyclicality of firm-level production. The main sources of variability of the US aggregate fluctuations during the Great Recession are countercyclical technology shocks, persistent adverse risk-premium shocks, and expansionary monetary policy shocks.

Keywords: Extensive margin; Entry and exit; DSGE Models; US Business cycles (search for similar items in EconPapers)
JEL-codes: E20 E32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:120:y:2020:i:c:s0165188920301652

DOI: 10.1016/j.jedc.2020.103997

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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