Entry and Exit, Unemployment, and Macroeconomic Tail Risk

Abstract

This paper builds a nonlinear business cycle model with endogenous firm entry and exit and equilibrium unemployment. The entry and exit mechanism generates asymmetry and amplifies the transmission of productivity shocks, exposing the economy to significant tail risk. When calibrating the rates of entry and exit to match their shares of job creation and destruction, our quantitative model generates higher-order moments consistent with U.S. data. Firm exit particularly amplifies the severity and persistence of deep recessions such as the COVID-19 crisis. In the absence of entry and exit, the model generates almost no asymmetry or tail risk.

Keywords: Unemployment, Firm Dynamics, Skewness, Labor Search, Nonlinear, COVID-19

JEL Classification: E24, E32, E37, J63, L11