Business cycle in an oligopolistic economy with entry and exit

In this paper we introduce a microfounded macromodel with endogenous market structure, where macroeconomic fluctuations may be determined by firms’ strategic interactions, entry and exit. All the agents have the same preferences but may differ in their budget constraints and change their social status according to idiosyncratic stochastic shocks that trigger entry, while exit is caused by firms’ bankruptcies. Our numerical simulations show that birth and death of firms (associated with entry and exit) can generate macroeconomic fluctuations without technology shocks.     

The impact of productivity and demand shocks on structural dynamics: Evidence from Austrian manufacturing

Based on Pasinetti's model of structural dynamics we develop an empirical identification strategy for aggregate and sectoral labor productivity and demand shocks in a structural vector autoregressive model with long-run restrictions. Impulse response analysis shows that we can distinguish four patterns of the effects of changes in demand and productivity growth on sectoral output growth. For some industries demand is indeed the factor driving sectoral growth. Labor productivity and demand shocks are closely associated with the growth rates of employment and output across industries. However, there is less correlation with entry and exit. This suggest that structural change within and between industries may have quite different determinants.     

Slow recoveries

Economies respond differently to aggregate shocks that reduce output. While some countries rapidly recover their pre-crisis trend, others stagnate. Recent studies provide empirical support for a link between aggregate growth and plant dynamics through its effect on productivity: the entry and exit of firms and the reallocation of resources from less to more efficient firms explain a relevant part of transitional productivity dynamics. In this paper, we use a stochastic general equilibrium model with heterogeneous firms to study the effect on aggregate short-run growth of policies that distort the process of birth, growth, and death of firms, as well as the reallocation of resources across economic units. Our findings show that indeed policies that alter plant dynamics can explain slow recoveries. We also find that output losses associated to delayed recoveries are large.     

Modelling economic hysteresis losses caused by sunk adjustment costs

Transition from one economic equilibrium to another as a consequence of shocks is often associated with sunk adjustment costs. Firm-specific sunk market entry investments (or sunk market exit costs) in case of a reaction to price shocks are an example. These adjustment costs lead to a dynamic supply pattern similar to hysteresis. In analogy to “hysteresis losses” in ferromagnetism, the authors explicitly model dynamic adjustment losses in the course of market entry and exit cycles. They start from the micro level of a single firm and use explicit aggregation tools from hysteresis theory in mathematics and physics to calculate dynamic losses. The authors show that strong market fluctuations generate disproportionately large hysteresis losses for producers. This could give a reason for the implementation of stabilizing measures and policies to prevent strong (price) variations or, alternatively, to reduce the sunk entry and exit costs.     

Technology diffusion and growth

Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to Luttmer (2007) [21]. If entrants can make only small improvements over the technologies used by the least productive incumbents, then the firm size distribution approximates Zipf?s law and entry and exit rates are high, as in the data.     

Fiscal Transfers in a Monetary Union with Exit Option

It is widely debated whether a monetary union has to be accompanied by a fiscal transfer scheme to accommodate asymmetric shocks. We build a model of a monetary union with a central bank and two heterogeneous countries that are linked by a fiscal transfer scheme with repercussions on monetary policy. A central bank aiming at securing the existence of a monetary union in the presence of asymmetric shocks has to compensate single countries for the tax distortions arising from fiscal transfers. Monetary policy may become more expansionary or restrictive depending on asymmetries between member countries' inflation aversion and exit costs.     

Industry equilibrium with random exit or default

An industry consisting of a large number of small price taking firms subject to idiosyncratic productivity shocks is considered. At the moment of entry, a firm takes on debt. We show that in a competitive equilibrium, some firms exit and pay out their debt while others choose to default. The outcome depends on the realization of firm‐specific shocks. The paper demonstrates that if the firms self‐select between exit with debt repayment and default, then the default region is disconnected from the exit region. The methodological contribution of the paper is the analytical characterization of the long‐run equilibrium for two scenarios of the initial distribution of productivity shocks. We consider two public policy mechanisms—contract enforcement and creditor protection. Our policy recommendation is that regulators need to reduce the contract enforcement if they want to decrease the long‐run default rate.     

Modeling China's inflation dynamics: An MRSTAR approach

This paper examines the nonlinearity of China's inflation rate and models its nonlinear dynamics using the multiple-regime smooth transition autoregressive model. The empirical results show that a four-regime logistic smooth transition autoregressive model can be used to model the nonlinear dynamics of China's inflation rate, and the impulse response analysis shows that the effect of shocks is transient and appears to be asymmetrical between the impulse responses to positive and negative shocks.     

Monetary and Fiscal Policy Rules in the EMU

Abstract. This paper studies the design and effects of monetary and fiscal policy in the euro area. To do so, a stylized two‐region model of monetary and fiscal policy rules in the EMU is built. We analyse how monetary and fiscal rules affect the adjustment dynamics in the model. Both the effects on the individual countries and on the EMU aggregate economy are studied. Three aspects play an important role in the analysis: (i) the consequences of alternative monetary and fiscal policy rules, (ii) the consequences of asymmetries between EMU countries (asymmetries in macroeconomic shocks and macroeconomic structures), and (iii) the role of alternative degrees of backward‐ and forward‐looking behaviour in consumer decisions and inflation expectations.     

Entry and exit of manufacturing plants over the business cycle

This paper analyzes the plant-level entry and exit over the business cycle. We document basic patterns of entry and exit of U.S. manufacturing plants between 1972 and 1997. We find that the entry rate is more cyclical than the exit rate. We also find that the differences in productivity and employment between booms and recessions are particularly larger for entering plants than for exiting plants. Our new finding suggests that the selection at the entry margin may be more important than the selection at the exit margin in understanding the plant-level dynamics over the business cycle.     

Entry and Exit Decisions with Switching Regime Excess Capacity

This paper examines how expected excess capacity fosters impediments to entry and incentives to exit. To examine this phenomenon, we apply the switching regime methods of Goldfeld and Quandt to a logit model using data from the U.S. aluminum industry over the period 1954 through 2010. The results show that both entry and exit decisions are statistically significantly affected by excess capacity. However, the correlation of entry and exit with capacity is more significant than with production. The evidence implies that excess capacity in the aluminum industry rises to be a substantial threat to entry only when the company produces ahead of demand growth. Excess capacity is also an impetus to exit during the later stage after primary aluminum production reverts to a declining trend.     

Stylised facts and other empirical evidence on firm dynamics,business cycle and growth

In this paper, we bring together, in a systematised fashion, the scattered empirical evidence relating firm dynamics with both short-run and long-run macroeconomic dynamics. There are numerous studies that focus on firm-level data while controlling for macroeconomic conditions. From these studies a fairly robust set of empirical regularities pertaining to entry, exit, growth and the size distribution of firms has emerged. However, the literature that focuses explicitly on the interplay between firm dynamics and the business cycle is roughly confined to the US experience and to the cyclical properties of firm entry and exit, while the studies about the relationship between firm dynamics and economic growth are limited and unsystematic. We also give a brief account of the most recent theoretical literature on firm dynamics and macroeconomic dynamics, and try to relate it to the empirical findings.     

Asymmetric inflation dynamics: Evidence from quantile regression analysis

This paper applies the regression quantile approach developed by Koenker and Xiao (2004) to investigate the dynamic behavior of inflation in 12 OECD countries. By analyzing the behavior in a wide range of quantiles, this method allows us to quantify the influence of various sizes of shocks that hit the inflation, and is able to capture possible asymmetric adjustment of the inflation towards to its long-run equilibrium. It therefore sheds new lights on the inflation dynamics compared with the conventional unit root methodologies. Our results suggest that generally, the inflation rates are not only mean-reverting but also exhibit asymmetries in their dynamic adjustments, in which large negative shocks tend to induce strong mean reversion, and on the contrary, large positive shocks do not. Policy implications related to the empirical findings are also provided.     

Do asymmetries matter for European monetary policy?

In this paper we analyze the impact of economic and institutional (ECB decision rules) asymmetries on the effectiveness of monetary policy in Euroland. We consider a model where asymmetric shocks and divergent propagation of shocks in output and inflation are potential causes of tensions within the ECB concerning the conduct of common monetary (interest rate) policy. Welfare implications of the alternative decision procedures are discussed.     

How does entry regulation influence entry into self‐employment and occupational mobility?1

We analyse how an entry regulation that imposes a mandatory educational standard affects entry into self‐employment and occupational mobility. We exploit German reunification as a natural experiment and identify regulatory effects by comparing differences between regulated and unregulated occupations in East Germany with the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into self‐employment and occupational mobility after reunification more in regulated occupations in East Germany than in West Germany. Our findings are relevant for transition or emerging economies as well as for mature market economies requiring large structural changes after unforeseen economic shocks.     

Firm creation,entry costs,and house-price volatility∗

Amid growing work on the link between firm creation and cyclical housing-market dynamics, we document a significant, positive, and robust cross-country relationship between the level of new firm creation and the cyclical volatility of house prices. Using a business-cycle model with endogenous firm entry, housing, and housing-finance constraints and shocks, we show that, via general equilibrium effects, greater average firm entry can be a powerful amplification mechanism of housing-finance shocks. These shocks and constraints play a key role in quantitatively rationalizing the link between firm creation and house-price volatility across countries.     

Fiscal Stabilization in the EMU

This paper analyzes the effects of macroeconomic shocks in the Economic and Monetary Union (EMU) using a stylized two-country model. First, it is shown how asymmetries between countries might matter in terms of the resulting business cycle fluctuations. More specifically, country-specific shocks are allowed for as well as cross-national differences in wage behavior. Second, it is shown by means of numerical simulations how national and federal fiscal stabilization policies can be used to dampen business cycle fluctuations in various (a)symmetric settings. The main innovation of the paper is to illustrate how structural differences between countries help to determine the impact of macroeconomic shocks and the effectiveness of fiscal policy.     

The Impact of Cost Changes on Industry Entry and Exit

Increases in costs may have interesting, non-obvious effects on industry entry and exit. Three cases are possible when costs rise: the competitor neutral case, in which entry decreases and exit increases, entrant favoring, in which entry and exit both increase, and incumbent favoring, in which entry and exit both decrease. The model places restrictions on which outcomes are possible given which costs rise (marginal or fixed). The model can be used to examine the impacts of cost-increasing regulation or exogenous process innovation on industry entry and exit.      

Asymmetries in bid and ask responses to innovations in the trading process

This paper proposes a new approach to jointly model the trading process and the revisions of market quotes. This method accommodates asymmetries in the dynamics of ask and bid quotes after trade-related shocks. The empirical specification is a vector error correction (VEC) model for ask and bid quotes, with the spread as the co-integrating vector, and with an endogenous trading process. This model extends the vector autoregressive (VAR) model introduced by Hasbrouck (Hasbrouck J (1991) Measuring the information content of stock trades. J Finance 46:179–207). We provide evidence against several symmetry assumptions, very familiar among microstructure models. We report asymmetric adjustments of ask and bid prices to trade-related shocks, and asymmetric impacts of buyer and seller-initiated trades. In general, buys are more informative than sells. The likelihood of symmetric quote responses increases with volatility. We show that our findings are robust across different model specifications, time frequencies, and trading periods. Moreover, we find similar asymmetries in markets with different microstructures.

Flexible exchange rates as shock absorbers

In this paper we analyze empirically the effect of terms of trade shocks on economic performance under alternative exchange rate regimes. We are particularly interested in investigating whether terms of trade disturbances have a smaller effect on growth in countries with a flexible exchange rate arrangement. We also analyze whether negative and positive terms of trade shocks have asymmetric effects on growth, and whether the magnitude of these asymmetries depends on the exchange rate regime. We find evidence suggesting that terms of trade shocks get amplified in countries that have more rigid exchange rate regimes. We also find evidence of an asymmetric response to terms of trade shocks: the output response is larger for negative than for positive shocks. Finally, we find evidence supporting the view that, after controlling for other factors, countries with more flexible exchange rate regimes grow faster than countries with fixed exchange rates.