The scarring effect of recessions

Min Ouyang ()

Journal of Monetary Economics, 2009, vol. 56, issue 2, 184-199

Abstract: According to the conventional view, recessions improve resource allocation by driving out less productive firms. This paper posits an additional scarring effect: recessions impede the developments of potentially superior firms by destroying them during their infancy. A model is developed to capture both the cleansing and the scarring effects. A key ingredient of the model is that idiosyncratic productivity is not directly observable, but can be learned over time. When calibrated with statistics on entry, exit and productivity differentials, the model suggests that the scarring effect dominates the cleansing effect, and gives rise to lower average productivity during recessions.

Keywords: Cleansing; effect; Scarring; effect; Creative; destruction; Learning; Demand; shocks (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (63)

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Related works:
Working Paper: The Scarring Effect of Recessions (2005)
Working Paper: The Scarring Effect of Recessions (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:2:p:184-199

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