A DSGE Model with Endogenous Entry and Exit
This paper describes a DSGE model where the extensive margin of activity —the number of varieties available for consumption—, depends on micro-founded decisions of entry and exit in the goods market. Both the extended model and a more conventional version have been estimated with US data during the Great Moderation period. Our main findings are two. First, the role of technology shocks for business cycle fluctuations increases significantly due to the flows of entry and exit. Second, the extensive margin of activity explains most of the business cycle reactions to supply-side shocks, whereas the intensive margin (firm-level output) takes most of the adjustment after demand-side shocks.