You are here

The Role of Firm Entry and Exit in Economic Growth

February 27, 2017
Firm Entry and Exit and
Aggregate Growth

Download the full paper

In a recent Staff Report published by the Federal Reserve Bank of Minneapolis, Tim Kehoe, Jose Asturias, Sewon Hur, and Kim Ruhl find that firm entry and exit contributes far more to aggregate productivity growth during periods of rapid aggregate growth than during periods of slower growth.

The paper examines Chile and Korea, two countries that experienced rapid growth followed by an economic slowdown. Researchers found that in both countries, the slowdown in growth was also accompanied by a decline in the contribution of plant entry and exit to aggregate productivity growth.

To further quantify these findings, the co-authors went onto build a dynamic general equilibrium model and found that if the distortions in economies with entry costs and barriers to technology adoption are eliminated, the model can replicate the increase in the productivity growth rate and the increasing importance of firm entry and exit. These findings suggest that the entry of productive firms and the exit of unproductive firms plays a key role in understanding rapid output growth, but less of a role during times of moderate output growth.

Timothy J. Kehoe is the Distinguished McKnight University Professor in the Department of Economics at the University of Minnesota.

Jose Asturias is an assistant professor of economics at Georgetown University's School of Foreign Service in Qatar and graduated from the University of Minnesota's Ph.D. program.

Sewon Hur is an assistant professor of economics at the University of Pittsburgh and graduated from the University of Minnesota's Ph.D. program.

Kim J. Ruhl is an associate professor of economics at Pennsylvania State University and graduated from the University of Minnesota's Ph.D. program.