Entry, Trade, and Exporting Over the Cycle
53 Pages Posted: 3 Sep 2019 Last revised: 10 Mar 2021
Date Written: August 2019
We study how international trade and the exporting decisions of establishments affect establishment creation over the business cycle in a general equilibrium model. The model captures two key features of establishment and exporter dynamics: i) new establishments start small and grow over time and ii) exporters tend to be bigger and more productive than non-exporters and remain so for some time. When the cost of creating establishments fluctuates with aggregate productivity, we find the model can generate procyclical fluctuations in the stock of domestic establishments and importers similar to the data. Without international trade, entry is weakly countercyclical and too smooth. The model also generates fluctuations in the stock of importers, exporters, and domestic establishments of similar magnitude to those in the data. With an entry margin, we also find that output is hump-shaped following a productivity shock since investments in creating establishments and exporters generate an incentive to delay accumulating physical capital. This hump is stronger in an open economy model and strongly increases the value of creating new establishments in a boom.
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