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The Cleansing Effect of Recessions

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  • Ricardo J. Caballero
  • Mohamad L. Hammour

Abstract

This paper investigates the response of industries to cyclical variations in demand in the context of a vintage model of ?creative destruction.? Due to process and product innovation, production units that embody the newest techniques are continuously being created, and outdated units are being destroyed. We investigate the extent to which changes in demand are accommodated on the creation or destruction margins. Although outdated production units are the most likely to turn unprofitable and be scrapped in a recession, they can be "insulated" from the fall in demand if it is accompanied by a reduction in the creation rate. The model's implications are broadly consistent with observed variations in manufacturing gross job flows. The calibrated model matches the relative volatilities of job creation and destruction, and their asymmetries over the cycle.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3922.

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Date of creation: Dec 1991
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Publication status: published as American Economic Review, Volume 84, No. 5, (December 1994), pp. 1350-1368
Handle: RePEc:nbr:nberwo:3922

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  1. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(6), pages 1163-90, December.
  2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, Econometric Society, vol. 60(2), pages 323-51, March.
  3. Jovanovic, Boyan & Lach, Saul, 1989. "Entry, Exit, and Diffusion with Learning by Doing," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 690-99, September.
  4. 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.
  5. 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.
  6. 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.
  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. Dickens, William T., 1982. "The productivity crisis: Secular or cyclical?," Economics Letters, Elsevier, Elsevier, vol. 9(1), pages 37-42.
  9. repec:fth:coluec:540 is not listed on IDEAS
  10. repec:fth:coluec:479 is not listed on IDEAS
  11. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 89-107, February.
  12. repec:fth:coluec:467 is not listed on IDEAS
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