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Improper Churn: Social Costs and Macroeconomic Consequences

  • Ricardo J. Caballero
  • Mohamad L. Hammour

This paper assembles elements that are essential in forming an integral picture of the way a churning' economy functions and of the disruptions caused by transactional difficulties in labor and financial markets. We couch our analysis in a stochastic equilibrium model anchored with US evidence on gross factor flows and on rents in worker and firm income. We develop a social accounting framework to measure the costs of transactional impediments. We calculate the average social loss associated with structural unemployment and low productivity -- due to technological sclerosis' and a scrambling' of productivity rankings in entry and exit decisions. We also estimate the loss from a recession. An additional forty percent to the traditional unemployment cost is due to reduced productivity and is determined by the recession's cumulative effect on the economy's churn rate. Although a recessionary shock increases the economy's turbulence' at impact, semi-structural VAR evidence from US manufacturing indicates that, cumulatively, it results in a chill' -- which is costly in an economy that suffers from sclerosis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6717.

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Date of creation: Sep 1998
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Handle: RePEc:nbr:nberwo:6717
Note: EFG
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  1. John M. Abowd & Thomas Lemieux, 1991. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," NBER Working Papers 3808, National Bureau of Economic Research, Inc.
  2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  3. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, vol. 39(1), pages 45-69, September.
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