Alessandro Ferrari, da UPF, vai apresentar Not-so-Cleansing Recessions.
Recessions are periods in which the least productive firms in the economy exit, and as the economy recovers, they are replaced by new and more productive entrants. These cleansing effectsimply that business cycles generate improvements in the average firm productivity. We argue that this is not sufficient to induce long-run gains in GDP and welfare. We show that these are driven by the intensity of love-of-variety in aggregate production. If industry output is aggregated with the standard CES aggregator, recessions do not bring about any improvement in GDP and welfare. If the economy features more love-of-variety than CES, the social planner finds it optimal to subsidize economic activity in recessions to avoid firm exit. We use the model and quasi-exogenous variation in demand to estimate love-of-variety. We find it to be significantly higher than implied by CES aggregation, suggesting that even the long-run effects of recessions are likely negative. Finally, we characterize the optimal policy response both along the transition and in the steady state.