Gokhool Urvahee - Academia.edu (original) (raw)
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Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry ... more Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry and exit amplify and propagate the effects of aggregate shocks. In turn, this leads to greater persistence and unconditional variation of aggregate time series. These results stem from well-documented features of firm dynamics such as procyclical entry and the negative association between age and growth. In the aftermath of a positive aggregate productivity shock, the number of entrants increases. Since the new firms are smaller than the incumbents, as in the data, the initial impact on aggregate dynamics is negligible. However, as the common productivity component reverts to its unconditional mean, the new entrants that survive grow larger over time, generating a wider and longer expansion than in a scenario without entry or exit. The theory also identifies a causal link between the drop in establishments at the outset of the great recession and the painstakingly slow speed of the recovery from it.
Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry ... more Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry and exit amplify and propagate the effects of aggregate shocks. In turn, this leads to greater persistence and unconditional variation of aggregate time series. These results stem from well-documented features of firm dynamics such as procyclical entry and the negative association between age and growth. In the aftermath of a positive aggregate productivity shock, the number of entrants increases. Since the new firms are smaller than the incumbents, as in the data, the initial impact on aggregate dynamics is negligible. However, as the common productivity component reverts to its unconditional mean, the new entrants that survive grow larger over time, generating a wider and longer expansion than in a scenario without entry or exit. The theory also identifies a causal link between the drop in establishments at the outset of the great recession and the painstakingly slow speed of the recovery from it.