Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/81898 
Authors: 
Year of Publication: 
2011
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 250
Publisher: 
Sveriges Riksbank, Stockholm
Abstract: 
We explore the implications of endogenous firm entry and exit for business cycle dynamics and optimal fiscal policy. We first show that when the firm exit rate is endogenous, negative technology shocks lead to reductions in the number of firms. Technology shocks therefore have additional effects on household welfare relative to an economy with only endogenous entry. Second, endogenous firm exit creates a new channel for monetary policy when debt contracts are written in nominal terms, as monetary shocks affect the rate of firm defaults. Monetary shocks therefore have real effects also when prices and wages are flexible. Third, we show that endogenous firm exit creates a new role for fiscal policy to increase efficiency and welfare by subsidizing firms and decreasing the number of defaults. Finally, we demonstrate that endogenous firm exit implies that non-persistent shocks to technology and money supply have persistent effects on labor productivity. This has implications for the estimated persistence of technology shocks.
Subjects: 
firm defaults
money supply shock
labor productivity
JEL: 
E32
E52
Document Type: 
Working Paper

Files in This Item:
File
Size
394.24 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.