The Firm Dynamics of Business Cycles

Author
Raveendranathan, Gajendran
Date
Jul 2019
We use firm dynamics statistics on employment by age, entry, exit, and job flows to identify sources of business cycle fluctuations in the U.S. economy since 1980.
We extend the Hopenhayn (1992) firm dynamics model by incorporating capital and debt accumulation to the firm's problem and savings to the consumer's problem. Analyzing the implications of unexpected productivity, credit, labor wedge, and investment wedge shocks for firm dynamics statistics, we show that (a) productivity shock accounts for the 1990-91 and 2001 recessions, and (b) productivity and credit shocks jointly account for the 1980-82 and 2007-09 recessions.