Endogenous product turnover and macroeconomic dynamic

Working paper

This paper introduces endogenous products entry and exit based on creation and destruction of product variety in a general equilibrium model. Recessionary technology shocks induce exit of unprofitable products on impact, allocating resources towards more productive production lines. However, during the recovery phase less productive production lines survive destruction, counteracting the original increase in productivity. The analysis shows that recoveries hinge on lower product destruction rather than higher product creation. Endogenous product destruction is critical to evaluate the effect of permanent policies of entry deregulation and subsidies aimed to stimulate the economy.

Authors: Zanetti, F; Hamano, M

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2015-10-01
• Paper number: 759
• Keywords: business cycles; firm heterogeneity; endogenous product destruction