The extensive margin and US aggregate fluctuations: A quantitative assessment

Abstract

We report empirical evidence indicating that US net business formation has recently turned more volatile, procyclical and persistent. To study these stylized facts, we estimate a DSGE model with endogenous entry and exit. Business units feature heterogeneous productivity and they shut down if the present value of expected future dividends falls below the current liquidation value. The model provides a better fit than a constant exit rate model with the fluctuations of US business formation. The introduction of the extensive margin amplifies the effects of technology and risk-premium shocks, and reduces the procyclicality of firm-level production. The main sources of variability of the US aggregate fluctuations during the Great Recession are countercyclical technology shocks, persistent adverse risk-premium shocks, and expansionary monetary policy shocks.

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“…Fourth, firms less than five years old produce about half of the economy's total output (Colciago, Etro, 2010;Davis et al, 2002;Bernard et al, 2010). Therefore, numerous theoretical works have been written to describe these relationships as best as possible (Casares et al, 2020;Obstbaum et al, 2023). The model proposed by Bilbie et al (2012) enjoys the greatest recognition among researchers who assume the existence of a finite number of companies on the market.…”