Entry, Exit, Firm Dynamics, and Aggregate Fluctuations
By Gian Luca Clementi and Dino Palazzo
American
Economic Journal: Macroeconomics, Volume 8, Issue 3, July 2016, pages 1-41
Abstract
Firm entry and exit amplify and propagate the effects of aggregate shocks,
leading to greater persistence and unconditional variation of aggregate
quantities. Following a positive aggregate shock, entry rises. As in the data,
entrants are small and their initial impact on aggregate dynamics is
negligible. However, as the common productivity component reverts to its
unconditional mean, the youngsters that survive grow larger, generating a wider
and longer expansion than in a scenario without entry or exit. The model also
identifies a causal link between the drop in establishments at the outset of
the Great Recession and the subsequent slow recovery.