Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

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  • Gian Luca Clementi
    Department of Economics, Stern School of Business, New York University, 44 West Fourth Street, New York, NY 10012 and NBER (e-mail: )
  • Berardino Palazzo
    Department of Finance, Questrom School of Business, Boston University, 595 Commonwealth Avenue, Boston, MA 02215 (e-mail: )

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<jats:p> 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. (JEL D21, D92, E22, E24, E32, G31, L11) </jats:p>

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