Fluctuations in Uncertainty, Efficient Borrowing Constraints, and Firm Dynamics
This research seeks to quantify the importance of microeconomic uncertainty shocks for the firm dynamics over the business cycle in an economy with frictional financial markets. The project documents novel facts on asymmetric response across age and size groups of firms in the U.S. to the changes in aggregate economic conditions. Age rather than size seems to be a relevant margin for the magnitude of employment volatility over the cycle; in particular total employment of young firms varies 2.6 times more relative to the old firms. A theory for this generates a link between firm's age and size and its ability to obtain exogenous financing. Contrary to the existing studies in the researcher's model, a financial friction originates endogenously due to the presence of the firm's private information and long-term, complete, financial contract between a firm and financial intermediary and it manifests itself as a borrowing constraint. In times of high idiosyncratic uncertainty the financial contract calls for tightening of the borrowing constraint transmitting the initial impulse into a decline in demand for production inputs and further into an economic downturn. This mechanism affects disproportionally young firms. Not only are they more constrained in borrowing but also they start smaller due to a reduced level of initial financing. A quantitative version of the model accounts for the fall in the credit to GDP ratio, asymmetric behavior of different groups of firms and decline of macroeconomic aggregates observed in the data. MSI resources will be used at various stages of the project. Firstly, a single solution of the model requires a Monte Carlo experiment which draws and simulates a behavior of few millions of firms. Secondly, the calibration procedure consists of a large scale optimization problem. In both steps the power of high-performance computing is essential.
A bibliography of this group’s publications is attached.
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