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Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 657 Abstract:
Given a common technology for replicating blueprints, high-quality blueprints will be replicated more quickly than low-quality blueprints. If quality begets quality, and firms are identified with collections of blueprints derived from the same initial blueprint, then, along a balanced growth path, Gibrat’s Law holds for every type of firm. A firm size distribution with the thick right tail observed in the data can then arise only when the number of blueprints in the economy grows over time, or else firms cannot grow at a positive rate on average. But when calibrated to match the observed firm entry rate and the right tail of the size distribution, this model implies that the median age among firms with more than 10,000 employees is about 750 years. The problem is Gibrat’s Law. If the relative quality of a firm’s blueprints depreciates as the firm ages, then the firm’s growth rate slows down over time. By allowing for rapid and noisy initial growth, this version of the model can explain high observed entry rates, a thick-tailed size distribution, and the relatively young age of large U.S. corporations.
Palabra clave: Gibrat's Law, Firm age and size distribution, and Capital accumulation Tema: L11 - Production, Pricing, and Market Structure; Size Distribution of Firms and O40 - Economic Growth and Aggregate Productivity: General
Creator: Arellano, Cristina, Bai, Yan, and Mihalache, Gabriel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 555 Abstract:
Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital inﬂows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments. The real exchange rate depreciates, a reﬂection of the scarcity of traded goods. We ﬁnd that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.
Palabra clave: Capital accumulation, Traded and nontraded production, European debt crisis, Real exchange rate, and Sovereign default with production economy Tema: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and F30 - International Finance: General