Abstract. In this paper I develop a detailed dynamic model of
firm behavior in order to see whether financial constraints and endogenous
exit are important propagation mechanisms. To do this, I construct an economy
where firms face financial constraints, fixed costs and persistent idiosyncratic
shocks. Using numerical methods, I analyze how a large collection of these
firms responds to aggregate productivity shocks. A common result is that
financial constraints tend to dampen the economy's initial response to
aggregate productivity shocks, but that equity accumulation and exit dynamics
amplify the longer-term response. The relative sizes of these two effects,
however, are sensitive to firms' environments.
Computer Code (Note: To free up space, some items might be missing: Feel free to email me.)
Underlying GAUSS codes (zipped). The two key files are the "clcns" ones. You can either solve the firm's problem from scratch, or generate time series from an existing set of policy functions. To do the latter, you will have to set the variable "useold" to "1" and you will need the policy vectors contained in the "optpol" files, which you can download here. It will be up to you to make sure the parameters of the model's current iteration are consistent with the parameters used to generate the policy functions. The "Markch" files comprise a GAUSS procedure library. You should load them in the appropriate subdirectories of your "gauss" directory.
This code utilizes work by John
Rust. Anyone interested in numerical dynamic programming should visit
his web page.