Firm dynamics, markup variations, and the business cycle

Abstract: We present a model in which net business formation is endogenously procyclical.Variations in the number of operating ?rms lead to countercyclical variations in markups that give rise to endogenous procyclical movements in measured total factor productivity (TFP). Based on this result, the paper suggests a simple structural decomposition of variations in TFP into those originating from exogenous shocks and those originating endogenously from the interaction between ?rms’entry and exit decisions and the degree of competition. The decomposition suggests that around 40% of the movements in measured TFP can be attributed to this interaction. Moreover, the paper analyzes the effects on (i) the measurement of the volatility of exogenous shocks in the U.S. economy and (ii) the magnification of shocks over the business cycle.

Keywords: Productivity, Business cycles, Firm dynamics, Markups

Authors: Nir Jaimovich, Max Floetotto

11 Jaimovich & Rebelo 2008.pdf