Macroeconomic Fluctuations and Firm Entry: Theory and Evidence

Abstract

This paper studies the behaviour of firm entry and exit in response to macroeconomic shocks. We formulate a dynamic stochastic general equilibrium model with an endogenous number of producers. From the calibrated model, we derive a minimum set of robust sign restrictions to identify four kinds of macroeconomic shocks in a vector autoregression, namely supply, demand, monetary and entry cost shocks. The variables entering the VAR are output, inflation, the nominal interest rate, profits and firm entry. The response of firm entry to the various shocks is freely estimated. Our main finding is that entry responds significantly to all types of shocks. The results also show a crowding-in of firm entry following an exogenous rise in demand, consistent with the effect of a consumption preference shock predicted by the model. JEL classification: E30, E32.

Endogenous Entry, Product Variety, and Business Cycles

“…However, Hopenhayn and Rogerson assume perfect competition in goods markets (as in Hopenhayn's, 1992, seminal model) and abstract from aggregate dynamics by focusing on stationary equilibria in which prices, employment, output, and the number of …rms are all constant. Lewis (2006) builds on the framework of this paper and estimates VAR responses (including those of pro…ts and entry as measured by net business formation) to macroeconomic shocks, …nding support for the sunk-cost driven dynamics predicted by our model. of business cycles.…”

The Effects of Endogenous Firm Exit on Business Cycle Dynamics and Optimal Fiscal Policy

“…We also tried other values for φ, but the exact value of the labor supply elasticity does not affect our main results. We set the parameter χ such that the steady state value of labor supply is one, and we follow earlier studies on firm entry (e.g., Lewis (2006) and Bilbiie et al (2007b)) in setting the entry cost f E equal to 1. Bernard et al (2003) calibrate the elasticity of substitution θ to fit U.S. plant and macro trade data.…”

“…Firms are founded by households subject to a fixed entry cost as in Bergin and Corsetti (2008), Bilbiie et al (2007aBilbiie et al ( ,b, 2008 and Lewis (2006). In addition, firms have to pay a fixed cost each period to be able to produce in the next period.…”

“…Therefore, we apply vector autoregressive regressions (VAR) to arrive at further evidence of the effect of monetary policy on firm dynamics. Bergin and Corsetti (2008) and Lewis (2006) provide evidence that contractionary monetary policy has negative effects on firm entry. We estimate the effects of monetary policy on firm exit using an identified VAR model.…”

The Domestic and International Effects of Interstate U.S. Banking

“…Our model builds on Ghironi and Melitz (2005) and Bilbiie, Ghironi, and Melitz (2012) by 1 We provide a more detailed account of the removal of geographical restrictions to U.S. bank expansion in a separate online Appendix available at http://faculty.washington.edu/ghiro. 2 See, for instance, Bilbiie, Ghironi, and Melitz (2012), Pesenti (2007, 2013), Ghironi and Melitz (2005), Lewis (2006), Méjean (2008), Notz (2012), and Stebunovs (2008).…”