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Entry, Exit and the Shape of Aggregate Fluctuations in a General Equilibrium Model with Capital Heterogeneity

Author

Listed:
  • Julia Thomas

    (The Ohio State University)

  • Berardino Palazzo

    (Boston University, School of management)

  • Aubhik Khan

    (Ohio State University)

  • Gian Luca Clementi

    (Stern School of Business)

Abstract
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.

Suggested Citation

  • Julia Thomas & Berardino Palazzo & Aubhik Khan & Gian Luca Clementi, 2014. "Entry, Exit and the Shape of Aggregate Fluctuations in a General Equilibrium Model with Capital Heterogeneity," 2014 Meeting Papers 1344, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1344
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    References listed on IDEAS

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    Cited by:

    1. Sungki Hong, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
    2. Michael Dinerstein & Troy D. Smith, 2021. "Quantifying the Supply Response of Private Schools to Public Policies," American Economic Review, American Economic Association, vol. 111(10), pages 3376-3417, October.
    3. Ia Vardishvili, 2020. "Entry Decision, the Option to Delay Entry, and Business Cycles," Auburn Economics Working Paper Series auwp2020-07, Department of Economics, Auburn University.
    4. William F. Lincoln & Andrew H. McCallum & Michael Siemer, 2019. "The Great Recession and a Missing Generation of Exporters," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(4), pages 703-745, December.
    5. Pavol Majher, 2015. "Firm entry and exit, investment irreversibility, and business cycle dynamics," Vienna Economics Papers 1513, University of Vienna, Department of Economics.
    6. William F. Lincoln & Andrew H. McCallum & Michael Siemer, 2017. "The Great Recession and a Missing Generation of Exporters," Finance and Economics Discussion Series 2017-108, Board of Governors of the Federal Reserve System (U.S.).
    7. William F. Lincoln & Andrew H. McCallum & Michael Siemer, 2018. "The Great Recession and a Missing Generation of Exporters," Working Papers 18-33, Center for Economic Studies, U.S. Census Bureau.
    8. Sungki Hong, 2019. "Customer Capital, Markup Cyclicality, and Amplification," 2019 Meeting Papers 959, Society for Economic Dynamics.
    9. Pavol Majher, 2015. "Firm entry and exit, investment irreversibility, and business cycle dynamics," Vienna Economics Papers vie1513, University of Vienna, Department of Economics.
    10. Stephie Fried & Kevin Novan & William Peterman, 2019. "The Macro Effects of Anticipating Climate Policy," 2019 Meeting Papers 683, Society for Economic Dynamics.
    11. William Lincoln & Andrew McCallum & Michael Siemer, 2018. "The Great Recession and a Missing Generation of Exporters," 2018 Meeting Papers 558, Society for Economic Dynamics.
    12. Michael Siemer, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series 2014-56, Board of Governors of the Federal Reserve System (U.S.).

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