Firm Dynamics, Markup Variations, and the Business Cycle

Posted: 17 Jun 2009

See all articles by Nir Jaimovich

Nir Jaimovich

University of Zurich

Max Floetotto

Stanford University

Abstract

We present a model in which net business formation is endogenously procyclical. Variations in the number of operating firms 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 firms' 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

JEL Classification: E32, L11, L16

Suggested Citation

Jaimovich, Nir and Floetotto, Max, Firm Dynamics, Markup Variations, and the Business Cycle. Journal of Monetary Economics, Vol. 55, No. 7, 2008, Available at SSRN: https://ssrn.com/abstract=1420966

Nir Jaimovich (Contact Author)

University of Zurich ( email )

Max Floetotto

Stanford University ( email )

Stanford, CA 94305
United States

HOME PAGE: http://www.stanford.edu/~maxf

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