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The Cleansing Effect of Recessions

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  • Caballero, Ricardo J
  • Hammour, Mohamad L

Abstract

The authors investigate industry response to cyclical variations in demand. Production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed. Although outdated units are the most likely to turn unprofitable and be scrapped in a recession, they can be 'insulated' from the fall in demand by a reduction in creation. The structure of adjustment costs plays a determinant role in the responsiveness of those two margins. The calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series, and their asymmetries over the cycle. Copyright 1994 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 84 (1994)
Issue (Month): 5 (December)
Pages: 1350-68

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Handle: RePEc:aea:aecrev:v:84:y:1994:i:5:p:1350-68

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  1. repec:fth:coluec:479 is not listed on IDEAS
  2. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
  3. repec:fth:coluec:467 is not listed on IDEAS
  4. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  5. Howitt, Peter & McAfee, R Preston, 1987. "Costly Search and Recruiting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 89-107, February.
  6. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December.
  7. J. Bradford De Long, . "`Liquidation' Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression," J. Bradford De Long's Working Papers _135, University of California at Berkeley, Economics Department.
  8. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
  9. repec:fth:coluec:540 is not listed on IDEAS
  10. Jovanovic, Boyan & Lach, Saul, 1988. "Entry, Exit, And Diffusion With Learning By Doing," Working Papers 88-16, C.V. Starr Center for Applied Economics, New York University.
  11. Dickens, William T., 1982. "The productivity crisis: Secular or cyclical?," Economics Letters, Elsevier, vol. 9(1), pages 37-42.
  12. Robert E. Hall, 1991. "Labor Demand, Labor Supply, and Employment Volatility," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 17-62 National Bureau of Economic Research, Inc.
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