Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-23T06:56:42.587Z Has data issue: false hasContentIssue false
  • English
  • Français

BUSINESS CYCLE EVIDENCE ON FIRM ENTRY

Published online by Cambridge University Press:  08 October 2009

Vivien Lewis
Vivien Lewis*
Affiliation:
Ghent University and National Bank of Belgium
*
Address correspondence to: Vivien Lewis, Department of Financial Economics, Ghent University, W. Wilsonplein 5D, 9000 Gent, Belgium; e-mail: [email protected]; URL: http://sites.google.com/site/vivienjlewis
Get access Rights & Permissions [Opens in a new window]

Abstract

Business cycle models with sticky prices and endogenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. I test some of these predictions using a VAR with model-based sign restrictions. I find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy, and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labor services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new firms to survive when the number of startups rises.

Keywords

Firm EntryBusiness CyclesVAR
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 5 , November 2009 , pp. 605 - 624
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Berentsen, Aleksander and Waller, Christopher J. (2007) Optimal Stabilization Policy with Endogenous Firm Entry. Manuscript, University of Basel and University of Notre Dame.Google Scholar
Bergin, Paul R. and Corsetti, Giancarlo (in press) The extensive margin and monetary policy. Journal of Monetary Economics.Google Scholar
Bilbiie, Florin O., Ghironi, Fabio, and Melitz, Marc J. (2007a) Endogenous Entry, Product Variety, and Business Cycles. National Bureau of Economic Research working paper 13646.CrossRefGoogle Scholar
Bilbiie, Florin O., Ghironi, Fabio, and Melitz, Marc J. (2007b) Monetary policy and business cycles with endogenous entry and product variety. NBER Macroeconomics Annual 22, 251–278.CrossRefGoogle Scholar
Campbell, Jeffrey R. (1998) Entry, exit, embodied technology, and business cycles. Review of Economic Dynamics 1 (2), 371–408.CrossRefGoogle Scholar
Chatterjee, Satyajit and Cooper, Russell (1993) Entry and Exit, Product Variety and the Business Cycle. National Bureau of Economic Research working paper 4562.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (1997) Sticky price and limited participation models of money: A comparison. European Economic Review 41 (6), 1201–1249.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.CrossRefGoogle Scholar
Das, Sanghamitra and Das, Satya P. (1996) Dynamics of entry and exit of firms in the presence of entry adjustment costs. International Journal of Industrial Organization 15, 217–241.CrossRefGoogle Scholar
Devereux, Michael B., Head, Allen C., and Lapham, Beverly J. (1996) Aggregate fluctuations with increasing returns to specialization and scale. Journal of Economic Dynamics and Control 20 (4), 627–656.CrossRefGoogle Scholar
Dixit, Avinash K. and Stiglitz, Joseph E. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67 (3), 297–308.Google Scholar
Erceg, Christopher J., Henderson, Dale W., and Levin, Andrew T. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46 (2), 281–313.CrossRefGoogle Scholar
Fisher, Jonas D.M. (2006) The dynamic effects of neutral and investment-specific technology shocks. Journal of Political Economy 114 (3), 413–451.CrossRefGoogle Scholar
GalíJordi, J. Jordi, J.López-Salido, David, and Vallés, Javier (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5 (1), 227–270, 03.CrossRefGoogle Scholar
Gort, Michael and Klepper, Steven (1982) Time paths in the diffusion of product innovations. Economic Journal 92, 630–653.CrossRefGoogle Scholar
Jaimovich, Nir and Floetotto, Max (in press) Firm dynamics, markup variations, and the business cycle. Journal of Monetary Economics.Google Scholar
Lewis, Vivien (2008) Optimal Monetary Policy and Firm Entry. Manuscript, Ghent University and National Bank of Belgium.Google Scholar
Peersman, Gert (2005) What caused the early millennium slowdown? Evidence based on vector autoregressions. Journal of Applied Econometrics 20 (2), 185–207.CrossRefGoogle Scholar
Peersman, Gert and Straub, Roland (2007) Putting the New Keynesian Model to a Test. Manuscript, Ghent University and European Central Bank.CrossRefGoogle Scholar
Rotemberg, Julio J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 1187–1211.CrossRefGoogle Scholar
Rotemberg, Julio J. (2007) Entry, aggregate output and monetary policy, a comment on “Monetary policy and business cycles with endogenous entry and product variety” by Florin Bilbiie, Fabio Ghironi, and Marc Melitz. NBER Macroeconomics Annual 22, 267–375.Google Scholar
Sims, Christopher A., Stock, James H., and Watson, Mark W. (1990) Inference in linear time series models with some unit roots. Econometrica 58 (1), 113–144.CrossRefGoogle Scholar
Taylor, John B. (1993), Discretion versus policy rules in practice. Carnegie–Rochester Conference Series on Public Policy 39, 195–214.CrossRefGoogle Scholar
Uusküla, Lenno (2008), Limited Participation or Sticky Prices? New Evidence from Firm Entry and Failures. Manuscript, European University Institute.Google Scholar