Modelling Entry Costs: Does it Matter for Business Cycle Transmission?

Abstract

This paper studies the business cycle implications of entry costs in a dynamic stochastic general equilibrium model with firm entry and nominal rigidity. Simulations show that my baseline model matches the dynamics observed in the data fairly well. Remarkably, it overcomes the difficulties common to standard business cycle and endogenous entry models in reproducing the persistence, smoothness and cyclicality of macroeconomic aggregates. I stress that capital entry costs are essential for these results.

Keywords: entry costs, firm entry, business cycle, investment costs

JEL Classification: E31, E32, E52