THE CLEANSING EFFECT OF RECESSIONS

We investigate industry response to cyclical variations in demand. Pro duction units that embody the newest process and product innovations a re continuously being created, and outdated units are being destroyed. Although outdated units are the most likely to turn unprofitable and be scrapped in a recession, they can be ''insulated'' from the fall in demand by a reduction in creation. The structure of adjustment costs plays a determinant role in the responsiveness of those two margins. T he calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series, and their asymmetri es over the cycle.