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Working Paper

Firm Entry and Exit and Aggregate Growth

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Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.
Topics
International economics
Economic growth
02.01.2019ISSN 2573-7953 WP 19-03Revisions WP 19-03RDOI 10.26509/frbc-wp-201903
Keywords entry, exit, productivity, entry costs, barriers to technology adoption
JEL Classification Codes E22, O10, O38, O47

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Asturias, Jose, Sewon Hur, Timothy J. Kehoe, and Kim J. Ruhl. 2019. “Firm Entry and Exit and Aggregate Growth.” Federal Reserve Bank of Cleveland, Working Paper No. 19-03. https://doi.org/10.26509/frbc-wp-201903