Slow Recoveries

Economies respond differently to aggregate shocks that reduce output. While some countries rapidly recover their pre-crisis trend, others stagnate. Recent studies provide empirical support for a connection between aggregate growth and plant dynamics through their effect on productivity: the entry and exit of firms and the reallocation of resources from less to more efficient firms explain a relevant part of transitional productivity dynamics. In this paper we use a stochastic general equilibrium model with heterogeneous firms to study the effect on aggregate short-run growth of policies that distort the process of birth, growth and death of firms, as well as the reallocation of resources across economic units. Our findings show that indeed, policies that alter plant dynamics can explain slow recoveries. Associated output losses are large