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The scarring effect of recessions

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Ouyang, Min

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Abstract

According to the conventional view, recessions improve resource allocation by driving out less productive firms. This paper posits an additional scarring effect: recessions impede the developments of potentially superior firms by destroying them during their infancy. A model is developed to capture both the cleansing and the scarring effects. A key ingredient of the model is that idiosyncratic productivity is not directly observable, but can be learned over time. When calibrated with statistics on entry, exit and productivity differentials, the model suggests that the scarring effect dominates the cleansing effect, and gives rise to lower average productivity during recessions.

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Publisher Info
Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 2 (March)
Pages: 184-199
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Handle: RePEc:eee:moneco:v:56:y:2009:i:2:p:184-199

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Web page: http://www.elsevier.com/locate/inca/505566

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Related research
Keywords: Cleansing effect Scarring effect Creative destruction Learning Demand shocks;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlos Carreira & Paulino Teixeira, 2007. "Internal and External Restructuring over the Cycle: A Firm-Based Analysis of Gross Flows and Productivity Growth in Portugal," GEMF Working Papers 2007-01, GEMF - Faculdade de Economia, Universidade de Coimbra. [Downloadable!]
  2. Min Ouyang, 2006. "Plant Life Cycle and Aggregate Employment Dynamics," Working Papers 050632, University of California-Irvine, Department of Economics. [Downloadable!]
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