The Cleansing Effect of Recessions

31 Pages Posted: 31 Jul 2007 Last revised: 22 Feb 2015

See all articles by Ricardo J. Caballero

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)

Date Written: December 1991

Abstract

This paper investigates the response of industries to cyclical variations in demand in the context of a vintage model of ?creative destruction.? Due to process and product innovation, production units that embody the newest techniques are continuously being created, and outdated units are being destroyed. We investigate the extent to which changes in demand are accommodated on the creation or destruction margins. Although outdated production units are the most likely to turn unprofitable and be scrapped in a recession, they can be "insulated" from the fall in demand if it is accompanied by a reduction in the creation rate. The model's implications are broadly consistent with observed variations in manufacturing gross job flows. The calibrated model matches the relative volatilities of job creation and destruction, and their asymmetries over the cycle.

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., The Cleansing Effect of Recessions (December 1991). NBER Working Paper No. w3922. Available at SSRN: https://ssrn.com/abstract=476111

Ricardo J. Caballero (Contact Author)

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

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Mohamad L. Hammour

Ecole Normale Superieure (ENS) ( email )

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Ecole Normale Superieure
75014 Paris
France
+33 143 136 305 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

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