Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier
Due to its impact on nominal firm profits, price rigidity amplifies the response of entry and exit to adverse supply shocks, such as COVID-19. This “entry-exit multiplier” triggers substantial magnification of the welfare losses due to negative supply shocks—even in an efficient-entry benchmark. In addition to those second-order effects, price rigidity also induces first-order amplification under external returns, when entry is no longer efficient. Endogenous entry-exit thus radically changes the consequences of nominal rigidities: in addition to the aggregate-demand amplification of supply disruptions, it also reconciles the response of hours worked across the benchmark New Keynesian and RBC models.
We thank Susanto Basu, Cristiano Cantore, Vasco Carvalho, Giancarlo Corsetti, Russell Cooper, Ryan Decker, Andrea Ferrero, Francesco Furlanetto, Jordi Galí, Pierre-Olivier Gourinchas, Basile Grassi, Antoine Lepetit, Sara Moreira, Anthony Savagar, Petr Sedlacek, Riccardo Silvestrini, Vincent Sterk, Paolo Surico, Mathias Thoenig, and Michael Woodford, as well as participants in numerous seminars and conferences for useful comments and discussions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.