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
This paper proposes uncertainty shocks as a new impulse driving business cycles. We first demonstrate that uncertainty, measured by a number of proxies, appears to be strongly countercyclical. When uncertainty is included in a standard vector-auto-regression, uncertainty shocks lead to a large drop and rebound in econonomic activity. Guided by this we build a stochastic dynamic general equilibrium model that extends the benchmark neoclassical growth model along two dimensions. It allows for heterogeneous firms with non-convex adjustment costs for both capital and labor, and time varying uncertainty defined as fluctuations in the variance of technology shocks. Increases in uncertainty lead to large drops in employment and investment. This occurs because uncertainty makes firms cautious, leading them to pausing hiring and investment. This freeze in activity also reduces the reallocation of capital and labor across firms, leading to a large fall in productivity growth. Taken together, the freeze in the hiring and investment, and the drop in relocation, lead to a business cycle sized drop and rebound in output, investment and productivity growth after a rise in uncertainty. Finally, we hope to use the census data to evaluate the relative importance of first and second moment shocks across the business cycle. The intuition behind this is a first moment shock changes the distribution of cross-sectional shocks between booms and recessions, while a second moment shock changes firms responses to the distribution of cross-sectional shocks.
[preliminary paper] [slides AEA] [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]