Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks

The B.E. Journal of Macroeconomics, 11(1), Topics, 35, 2011.

30 Pages Posted: 4 May 2023 Last revised: 8 Jun 2023

Date Written: September 1, 2011

Abstract

We consider policy distortions in a model where plants face idiosyncratic productivity shocks that evolve following a Brownian motion. Introducing idiosyncratic shocks into the model implies that plants have non-constant operating profits and as a result there is an endogenous exit margin and incumbent plants must decide in each period whether or not to remain in the industry. By using the forward Kolmogorov equation, we analytically characterize the Stationary Equilibrium. Our main contribution is to show that if a model is being calibrated/estimated without idiosyncratic shocks, where plants face constant productivity over time and the exit rate is exogenous to fit data generated from a model with shocks and endogenous entry, TFP distortions will be overestimated.

Keywords: TFP, plant heterogeneity, productivity, policy distortions

Suggested Citation

Da-Rocha, Jose-Maria and Pujolas, Pau, Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks (September 1, 2011). The B.E. Journal of Macroeconomics, 11(1), Topics, 35, 2011., Available at SSRN: https://ssrn.com/abstract=4426663 or http://dx.doi.org/10.2139/ssrn.4426663

Jose-Maria Da-Rocha

Universidade de Vigo ( email )

Pau Pujolas (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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