Comment

Abstract

This very interesting paper by Gianmarco Ottaviano explores the dynamics of fi rm behavior over the business cycle in a model with fi rm entry and exit. The paper has a number of precise predictions, and raises challenges for modeling macroeconomies. My aim in these brief comments is simply to draw links to the literature. I will not give a comprehensive review—this is certainly not my area of expertise—but I do want to indicate different literatures to which this paper belongs. In the introductory comments, Ottaviano links the paper to models of creative destruction, to models of search, and to macroeconomic models with imperfect competition. There are other literatures that, I think, are even more closely related. One really fascinating aspect of the analysis in this paper is that it raises questions about what macroeconomists mean by aggregate total factor productivity (TFP). Even if we could measure TFP at the fi rm level, it is not clear what the right way is to aggregate fi rm TFP to get a measure of economywide TFP. Aggregate statistics suggest a close link between TFP fl uctuations and the business cycle, and of course there has been a long ongoing debate about the meaning of that link. That is, does measured TFP capture actual exogenous changes in productivity, or is there labor hoarding, and so forth, that leads to endogenous movement in TFP? In this paper, exogenous shocks to labor productivity drive the business cycle. However, the implications for economywide TFP are not so clear. In the model, an increase in the productivity level of all fi rms draws less productive fi rms into production. Average productivity, as measured by the simple average of productivity over all fi rms in the economy, is infl uenced not only by the increase in productivity of fi rms