Oil price shocks, firm entry and exit in a heterogeneous firm model

Abstract

Oil price shocks are considered to be one of the important factors behind US recessions, yet little is known about the transmission channels of oil price shocks. What complicates the matter further is the small share of oil in production. To address the issue the literature has incorporated amplifying channels such as endogenous depreciation or variable markups. I build a DSGE model with heterogeneous firms and show that inclusion of firm entry and exit amplifies the effect of oil price shocks. Using US firm-level data, I see that oil shocks are negatively correlated with firm entry and positively correlated with firm exit as predicted by the model. Further, the DSGE model suggests it is the bigger and more-productive firms that survive after an oil price shock.