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News shock,firm dynamics and business cycles: Evidence and theory
Institution:1. Institute of World Economy, School of Economics, Fudan University, Shanghai, China;2. School of International Business Administration, Shanghai University of Finance and Economics, Shanghai, China;3. Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong;4. Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China;1. Department of Economics, Hong Kong University of Science and Technology, Hong Kong, China;2. Federal Reserve Bank of St. Louis, United States;3. Tsinghua University, China;4. Antai College of Economics and Management, Shanghai Jiao Tong University, China;1. Department of Economics, Chinese University of Hong Kong, Shatin, New Territories, Hong Kong;2. Department of Economics, Hong Kong University of Science and Technology, Hong Kong;3. School of International Trade and Economics, University of International Business and Economics, China;1. KU Leuven, Center for Economic Studies, Naamsestraat 69, 3000 Leuven, Belgium;2. Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany;3. National Bank of Belgium, de Berlaimontlaan 14, 1000 Brussels, Belgium;4. Ghent University, Sint-Pietersplein 5-7, 9000 Ghent, Belgium;1. University of Tasmania, Australia;2. The University of Adelaide, Australia
Abstract:The literature of expectation-driven business cycles has overlooked the role played by endogenous entry. This paper documents empirically news shock as a major source of fluctuations in firm dynamics and comovement between firm entry and GDP using structural vector auto-regressions. We then develop a tractable dynamic stochastic general equilibrium model to study the propagation mechanism assuming fixed operating costs for incumbents and decreasing survival rates for entrants. Our quantitative prediction closely matches the positive comovement between firm entries and core macroeconomic indicators upon news shock. These results remain robust at the sectoral level when the baseline model is extended to a two-sector setup.
Keywords:Firm dynamics  Endogenous survival rate  Expectation driven business cycles  Sectoral comovements
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