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Firm Dynamics in News Driven Business Cycle: The Role of Endogenous Survival Rate

Xu, Zhiwei and Fan, Haichao (2010): Firm Dynamics in News Driven Business Cycle: The Role of Endogenous Survival Rate.

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Abstract

Our structural VAR shows that the new business formation in U.S. data has similar positive co-movement pattern as common aggregate variables in response to a favorable anticipated shock about technology. However, incorporating �firm dynamics into Jaimovich and Rebelo's (Jaimovich and Rebelo, 2009, American Economic Review) model cannot explain our empirical fi�nding. Even worse, the model predicts an aggregate recession instead of a boom. Then, we show that this problem can be resolved with a minor modification by introducing endogenous survival rate of the new entrants.

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