Max Floetotto

with Nir Jaimovich, Journal of Monetary Economics, 2008
We present a model in which net business formation is endogenously procyclical. Variations in the number of operating firms lead to countercyclical variations in markups that give rise to endogenous procyclical movements in measured total factor productivity (TFP). Based on this result, the paper suggests a simple structural decomposition of variations in TFP into those originating from exogenous shocks and those originating endogenously from the interaction between firms’ entry and exit decisions and the degree of competition. This decomposition suggests that around 40% of the movements in measured TFP can be attributed to this interaction. Moreover, the paper analyzes the effects on (i) the measurement of the volatility of exogenous shocks in the U.S. economy and (ii) the magnification of shocks over the business cycle.
[paper] [online appendix]

with Nick Bloom and Nir Jaimovich
We propose uncertainty shocks as an additional impulse driving business cycles. First, we demonstrate that uncertainty, measured by a number of proxies, appears to be strongly countercyclical. When uncertainty is included in a standard vector au- toregression, increases in uncertainty lead to a large drop and subsequent rebound in economic activity. Second, we build a dynamic stochastic general equilibrium model that extends the benchmark neoclassical growth model along two dimensions. It allows for the existence of heterogeneous ?rms with non-convex adjustment costs in both capi- tal and labor, as well as time-variation in uncertainty that is modeled as a change in the variance of innovations to productivity. We ?nd that increases in uncertainty lead to large drops in economic activity. This occurs because a rise in uncertainty makes firms cautious, leading them to pause hiring and investment, and reduces the reallocation of capital and labor across firms, leading to a large fall in productivity growth. Finally, we show that uncertainty signifcantly reduces the response of the economy to stimulative policy, relative to its response during low uncertainty periods. This implies that in order for policy during high uncertainty periods to have the same effect it would as under low uncertainty periods, the policy impulse should be signifcantly larger and temporary.
[preliminary paper (July 2009)] [slides NBER 2009] [census application] [press (German)]

with Nir Jaimovich and Seth Pruitt
The two sector model presented in this note suggests a simple structural decomposition of movements in the price of investment goods into exogenous and endogenous sources. The endogenous fluctuations arise in the presence of countercyclical markups which vary differently across the consumption and investment sectors. In turn, the movements in the markups are due to endogenous procyclical net business formation. The model, while being consistent with the countercyclicality of the price of investment goods, suggests that about a quarter of the movement in the price series can be attributed to this endogenous mechanism.
[paper]