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Asymmetric Firm Dynamics under Rational Inattention

  • Antonella Tutino

    (Federal Reserve Bank of Dallas)

  • Anton Cheremukhin

    (Federal Reserve Bank of Dallas)

We document new evidence on the link between business failures, markups and business cycle asymmetry in the U.S. economy. We study a model where costly information-processing constraints affect exit decisions of heterogeneous firms in the presence of an aggregate demand externality. We show that such a model is capable of explaining both the novel and the classical empirical evidence on output growth asymmetry, the asymmetry between entry and exit rates, as well as counter-cyclical variations in profit margins.

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File URL: https://www.economicdynamics.org/meetpapers/2012/paper_161.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 161.

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Date of creation: 2012
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Handle: RePEc:red:sed012:161
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
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  1. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  2. Pauli Murto & Juuso Välimäki, 2011. "Learning and Information Aggregation in an Exit Game," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1426-1461.
  3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Maćkowiak, Bartosz & Wiederholt, Mirko, 2009. "Optimal sticky prices under rational inattention," Working Paper Series 1009, European Central Bank.
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  6. Tutino, Antonella, 2011. "Rationally inattentive macroeconomic wedges," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 344-362, March.
  7. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May.
  8. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  9. David P. Myatt & Chris Wallace, 2012. "Endogenous Information Acquisition in Coordination Games," Review of Economic Studies, Oxford University Press, vol. 79(1), pages 340-374.
  10. Satyajit Chatterjee & Russell W. Cooper, 1993. "Entry and exit, product variety and the business cycle," Working Papers 93-30, Federal Reserve Bank of Philadelphia.
  11. Jaimovich, Nir, 2007. "Firm dynamics and markup variations: Implications for sunspot equilibria and endogenous economic fluctuations," Journal of Economic Theory, Elsevier, vol. 137(1), pages 300-325, November.
  12. McKay, Alisdair & Reis, Ricardo, 2008. "The brevity and violence of contractions and expansions," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 738-751, May.
  13. Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.
  14. Florin Bilbiie & Fabio Ghironi & Marc J. Melitz, 2007. "Endogenous Entry, Product Variety, and Business Cycles," NBER Working Papers 13646, National Bureau of Economic Research, Inc.
  15. Christian Hellwig & Laura Veldkamp, 2006. "Knowing what others Know: Coordination motives in information acquisition," 2006 Meeting Papers 361, Society for Economic Dynamics.
  16. Florin Bilbiie & Fabio Ghironi & Marc Melitz, 2012. "Endogenous Entry, Product Variety and Business Cycles," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00680634, HAL.
  17. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
  18. Yuriy Gorodnichenko & Olivier Coibion, 2010. "What can survey forecasts tell us about informational rigidities?," 2010 Meeting Papers 277, Society for Economic Dynamics.
  19. Martin Sola & Zacharias Psaradakis, 2002. "On Detrending and Cyclical Asymmetry," Department of Economics Working Papers 020, Universidad Torcuato Di Tella.
  20. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  21. Christopher J. Nekarda & Valerie A. Ramey, 2013. "The Cyclical Behavior of the Price-Cost Markup," NBER Working Papers 19099, National Bureau of Economic Research, Inc.
  22. Abbritti, Mirko & Fahr, Stephan, 2013. "Downward wage rigidity and business cycle asymmetries," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 871-886.
  23. Cooper, Russell & Haltiwanger, John & Willis, Jonathan L., 2007. "Search frictions: Matching aggregate and establishment observations," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 56-78, September.
  24. Loungani, Prakash & Stekler, Herman & Tamirisa, Natalia, 2013. "Information rigidity in growth forecasts: Some cross-country evidence," International Journal of Forecasting, Elsevier, vol. 29(4), pages 605-621.
  25. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," NBER Working Papers 12167, National Bureau of Economic Research, Inc.
  26. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  27. Filip Matejka & Christopher A. Sims, 2011. "Discrete Actions in Information-Constrained Tracking Problems," CERGE-EI Working Papers wp441, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  28. Antonella Tutino, 2012. "Online Appendix to "Rationally inattentive consumption choices"," Technical Appendices 11-143, Review of Economic Dynamics.
  29. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  30. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  31. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
  32. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  33. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 627-656, April.
  34. Russell Cooper & John Haltiwanger & Jonathan L. Willis, 2007. "Implications of Search Frictions: Matching Aggregate and Establishment-level Observations," NBER Working Papers 13115, National Bureau of Economic Research, Inc.
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