Entry and Exit, Unemployment, and Macroeconomic Tail Risk

29 Pages Posted: 30 Jun 2020

See all articles by Joshua Bernstein

Joshua Bernstein

Indiana University Bloomington - Department of Economics

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel Throckmorton

affiliation not provided to SSRN

Date Written: June, 2020

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

Suggested Citation

Bernstein, Joshua and Richter, Alexander W. and Throckmorton, Nathaniel, Entry and Exit, Unemployment, and Macroeconomic Tail Risk (June, 2020). FRB of Dallas Working Paper No. 2018, Available at SSRN: https://ssrn.com/abstract=3638738 or http://dx.doi.org/10.24149/wp2018

Joshua Bernstein (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel Throckmorton

affiliation not provided to SSRN

No Address Available

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