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Cyclical net entry and exit

Joshua Bernstein, Alexander Richter () and Nathaniel Throckmorton

European Economic Review, 2021, vol. 136, issue C

Abstract: This paper examines how the interplay between cyclical net entry and exit of firms and search and matching frictions affect business cycle dynamics. We show cyclical net entry and exit reallocates inputs across firms and destroys jobs in recessions, which amplifies and skews business cycle dynamics. The model matches the volatility and skewness of real activity, the fast rise and slow decline in unemployment that occurs in recessions, and the counter-cyclical variation in macroeconomic uncertainty. Cyclical net entry and exit generates a 20% increase in volatility, 40% increase in skewness, and 55% increase in the welfare cost of business cycles.

Keywords: Firm entry; Firm exit; Unemployment; Nonlinear; Skewness; Welfare; Uncertainty (search for similar items in EconPapers)
JEL-codes: E24 E32 E37 J63 L11 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2021.103752

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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