Entry, Exit and the Shape of Aggregate Fluctuations in a General Equilibrium Model with Capital Heterogeneity
Aubhik Khan () and
Gian Luca Clementi
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Berardino Palazzo: Boston University, School of management
Gian Luca Clementi: Stern School of Business
No 1344, 2014 Meeting Papers from Society for Economic Dynamics
Examining standard business cycle moments and impulse responses, we find that changes in entry and exit rates and the age-size composition of firms amplify responses over a typical business cycle driven by a disturbance to aggregate productivity and, to a lesser extent, protract them. Both results stem from an endogenous drag on TFP induced by a missing generation effect, whereby an usually small number of entrants fails to replace an increased number of exitors; this effect is most injurious several years out as the reduced cohorts of young firms approach maturity. Declines in the number of firms, and most notably in the numbers of young firms, were dramatic over the U.S. 2007-9 recession. In an exercise designed to emulate that unusual episode, we consider a second shock that more directly affects entry and the exit decisions of younger firms. We find that it sharpens the missing generation effect, delivering far more anemic recovery.
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