Firm Demographics and the Great Recession

Peifan Wu, Berardino Palazzo and Gian Luca Clementi
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Peifan Wu: Stern School of Business
Gian Luca Clementi: Stern School of Business

No 1511, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: The last U.S. recession stands out not only for its depth, but also for the rather slow recovery the followed it. What is less well known is that the number of productive units also dropped substantially, while it barely budged in occasion of the 1981 recession, and kept increasing during the 1991 and 2001 recessions. To the extent that the stock of establishments is a very slow--moving variable, a recession characterized by an unusually large drop in establishments will necessarily be followed by a slow recovery. In order to evaluate the quantitative significance of this simple mechanism, we build a general equilibrium business cycle model with heterogenous firms and endogenous entry and exit, and calibrate it so that the implied firm--level and aggregate dynamics are consistent with the empirical evidence. Preliminary results show that, when hit with a negative total factor productivity shock, the model produces a much more persistent decline in employment and output than an off-the-shelf model with a fixed number of establishments.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1511

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