Improper Churn: Social Costs and Macroeconomic Consequences

Posted: 23 Dec 1998  

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mohamad L. Hammour

Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

Abstract

This paper assembles elements that are essential in forming an integral picture of the way a "churning" economy functions and of the disruptions caused by transactional difficulties in labor and financial markets. We couch our analysis in a stochastic equilibrium model anchored with U.S. evidence on gross factor flows and on rents in worker and firm income. We develop a social accounting framework to measure the costs of transactional impediments. We calculate the average social loss associated with structural unemployment and low productivity--due to technological "sclerosis" and a "scrambling" of productivity rankings in entry and exit decisions. We also estimate the loss from a recession. An additional forty percent to the traditional unemployment cost is due to reduced productivity and is determined by the recession's cumulative effect on the economy's churn rate. Although a recessionary shock increases the economy's "turbulence" at impact, semi-structural VAR evidence from U.S. manufacturing indicates that, cumulatively, it results in a "chill"-- which is costly in an economy that suffers from sclerosis.

JEL Classification: E24, E44, J41, J64

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., Improper Churn: Social Costs and Macroeconomic Consequences (July 1998). MIT Department of Economics Working Paper No. 98-11. Available at SSRN: https://ssrn.com/abstract=137176

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Mohamad L. Hammour

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

Ecole Normale Superieure (ENS) ( email )

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France
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