Limited Re-Entry and Business Cycles

Abstract

This paper builds a model of firm dynamics to study the consequences of "Limited re-entry" for macroeconomic dynamics. In the literature, exit has typically been modeled as a permanent decision whereby it is not possible for an exiting plant or firm to "re-enter" in the future. This paper relaxes this assumption by assuming that the exit decision is not permanent, but that an exiting producer still has a "limited" ability to re-enter. The model, reasonably calibrated, indicates that limited re-entry has made business cycles more volatile and persistent, and has contributed to the slow recovery following the 2007-09 recession.