Macroeconomic Fluctuations and Firm Entry: Theory and Evidence

Vivien Lewis
2006 Social Science Research Network  
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
more » ... 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.
doi:10.2139/ssrn.1687698 fatcat:lqdbzviiibaffasdko4dkap56e