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Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks
1Universitat Autonoma de Barcelona and RGEA—Universidade de Vigo, (email)
2I.D.E.A. and Universitat Autonoma de Barcelona, (email)
Citation Information: The B.E. Journal of Macroeconomics. Volume 11, Issue 1, ISSN (Online) 1935-1690, DOI: 10.2202/1935-1690.2297, November 2011
- Published Online:
We consider policy distortions in a model where plants face idiosyncratic productivity shocks that evolve following a Brownian motion. Introducing idiosyncratic shocks into the model implies that plants have non-constant operating profits and as a result there is an endogenous exit margin and incumbent plants must decide in each period whether or not to remain in the industry. By using the forward Kolmogorov equation, we analytically characterize the Stationary Equilibrium. Our main contribution is to show that if a model is being calibrated/estimated without idiosyncratic shocks, where plants face constant productivity over time and the exit rate is exogenous to fit data generated from a model with shocks and endogenous entry, TFP distortions will be overestimated.