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Firm Entry and Exit and Aggregate Growth

Staff Report 544 | Revised September 27, 2021

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Authors

Jose Asturias United States Census Bureau
Sewon Hur Federal Reserve Bank of Dallas
Timothy J. Kehoe Consultant, University of Minnesota, and National Bureau of Economic Research
Kim J. Ruhl University of Wisconsin and National Bureau of Economic Research
Firm Entry and Exit and Aggregate Growth

Abstract

Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. To analyze this relationship, we develop a model of firm entry and exit based on Hopenhayn (1992). When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.




Forthcoming in: _American Economic Journal: Macroeconomics_ https://www.aeaweb.org/articles?id=10.1257/mac.20200376&&from=f.