Entry and exit, cycles, and productivity growth

This paper examines the impact of cycles on long-term growth in the presence of entry and exit of firms. It is argued that, whereas mild fluctuations may be beneficial for growth, more severe fluctuations will be detrimental for growth. The essential point is whether recessions go beyond the point that triggers (large-scale) exit of firms. Mild fluctuations may have a positive effect through the intertemporal substitution between production and productivity improving activities. Severe fluctuations, however, which lead to exit of firms, cause losses of knowledge and skills during recessions and are therefore bad for long-term growth.