We study the cyclical implications of endogenous …rm-level entry and exit decisions in a dynamic, stochastic general equilibrium model wherein …rms face persistent shocks to both aggregate and individual productivity. The model we explore is in the spirit of Hopenhayn (1992). Firms decisions regarding entry into production and their subsequent continuation are a¤ected not only by their expected productivities, but also by the presence of convex and nonconvex capital ad-justment costs, and hence their existing stocks. Our model is unique relative to other DSGE settings in that our incumbent …rms face two discrete choices, one regarding continuation and one regarding capital adjustment. As such, we can explore how age, size and selection reshape macroeconomic uctuations in an equilibrium environment with realistic …rm life-cycle dynamics and investment patterns. Examining standard business cycle moments and impulse responses, we …nd that changes in entry and exit rates and the age-size composition of …rms amplify responses over a typical business cycle driven by a disturbance to aggregate productivity and, to a lesser extent, protract them. Both results stem from an endogenous drag on TFP induced by a missing generation e¤ect, whereby an usually small number of entrants fails to replace an increased number of exitors. This e¤ect is most injurious several years out as the reduced cohorts of young …rms approach maturity. Declines in the number of …rms, and most notably in the numbers of young …rms, were dramatic over the U.S. 2007 recession. In an exercise designed to emulate that unusual episode, we consider a second shock that more directly a¤ects entry and the exit decisions of younger …rms. We …nd that it sharpens the missing generation e¤ect, delivering far more anemic recovery, and thus closer resemblance to the U.S. post-2009Q2 experience.

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A large body of empirical literature documents that …rm size distribution is highly-skewed and rms respond di¤erently by size and age over business cycles. We quantitatively investi-gate macroeconomic implications of matching the empirical size distribution in a model with production heterogeneity. We build an equilibrium model of heterogeneous …rms, where each rm faces with a forward-looking collateral constraint for borrowing. We compare the aggre-gate dynamics of our model economy by changing our speci…cation of …rm-level productivity. We identify that the symmetric treatment of idiosyncratic productivity can be misleading, especially upon a …nancial shock. Aggregation over a skewed …rm size distribution implies that recovery from a credit crunch is relatively slower, amplifying resource misallocation from the borrowing constraint. We also study the micro-level employment dynamics upon exogenous shocks. In our model, a credit shock causes more disproportionate responses by rms; net employment growth among young …rms falls further. It follows that reallocation is further restricted among small and young …rms because of their limited credit, indicating that only productive young …rms grow faster. JEL Classi…cation: