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ENERGY IN A MODEL OF FIRM ENTRY

Published online by Cambridge University Press:  01 August 2018

Soma Patra
Soma Patra*
Affiliation:
California State University at Northridge
*
Address correspondence to: Soma Patra, Department of Economics, California State University, Northridge, 18111 Nordhoff Street, Northridge, CA91330, USA; e-mail: [email protected]; website: https://somapatra.weebly.com/
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Abstract

Nine out of the last ten recessions in the United States have been preceded by an increase in the price of oil as noted by Hamilton [Palgrave Dictionary of Economics]. Given the small share of energy in gross domestic product this phenomenon is difficult to explain using standard models. In this paper, I show that firm entry can be an important transmission and amplifying channel for energy price shocks. The results from the baseline dynamic stochastic general equilibrium (DSGE) model predict a drop in output that is two times the impact in a model without entry. The model also predicts an increase in energy prices would lead to a decline in real wages, investment, consumption, and return on investment. Additionally, using US firm level data, I demonstrate that a rise in energy prices has a negative impact on firm entry as predicted by the DSGE model. This lends further support toward endogenizing firm entry when analyzing the effects of energy price shocks.

Keywords

Oil PricesFirm EntryDSGEVAR
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 231 - 254
Copyright
© Cambridge University Press 2018

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Footnotes

I am indebted to Nathan Balke for all his suggestions and continuous encouragement. I would also like to thank Thomas Fomby, Anna Kormilitsina, Mine Yucel, Michael Plante, Enrique Martinez Garcia, Mario Crucini, Mark Wynne, and two anonymous referees for their comments and suggestions. In addition, I am grateful to Paul Bergin for sharing his data. All remaining errors are mine.

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