Petr Sedláček
Associate Professor


Working Papers

Nature of Firm Growth

with Benjamin Pugsley and Vincent Sterk
Available as a CFM Discussion Paper 2017-37
September 2018

[VoxEU column] [Appendix]
[View abstract]

Fifty percent of startups fail within five years, and those that survive grow at vastly different speeds. Using Census microdata, we estimate that the lion's share of these differences is determined by ex-ante heterogeneity rather than persistent ex-post shocks. Embedding such heterogeneity in a firm dynamics model shows that ex-ante differences are key determinants of the firm size distribution, up-or-out dynamics, and associated aggregate gains. Gazelles, rare high-growth startups, are essential for these outcomes. Analyzing changes in the distribution of ex-ante heterogeneity over time reveals that the birth rate and growth potential of gazelles has declined, creating substantial aggregate losses.

The Costs of Economic Nationalism: Evidence from the Brexit Experiment

with Benjamin Born, Gernot Mueller and Moritz Schularick
Previously circulated as "The Economic Costs of the Brexit Vote"
Available as a CEPR Discussion Paper 12454 and as a CFM Discussion Paper 2017-38
February 2019
Revision requested at The Economic Journal
In the media: Financial Times, The Independent, Bloomberg

[VoxEU column]
[View abstract]

Economic nationalism is on the rise, but at what cost? We study this question using the unexpected outcome of the Brexit vote as a natural macroeconomic experiment. Employing synthetic control methods, we first show that the Brexit vote has caused an output loss of about 2.4 percent by year-end 2018. An expectations-augmented VAR reveals that these costs are to a large extent caused by a downward revision of growth expectations in response to the vote. Linking quasi-experimental identification to structural time-series estimation allows us to not only quantify the aggregate costs but also to understand the channels through which expected economic disintegration impacts the macroeconomy.

Publications in Refereed Journals

Reviving American Entrepreneurship? Tax Reform and Business Dynamism

with Vincent Sterk
Accepted at the Journal of Monetary Economics
Prepared for the Carnegie-Rochester-NYU Conference Series on Public Policy
Available as a CEPR Discussion Paper 13073

[View abstract]

The 2017 Tax Cuts and Jobs Act slashed tax rates on business income and introduced immediate expensing of investments. Using a quantitative heterogeneous- firms model, we investigate the long-run e ects of such tax reforms on firm dynamics. We find that they can substantially increase business dynamism, potentially offsetting the large decline in the U.S. startup rate observed over recent decades. This result is driven by indirect equilibrium forces: the tax reform stimulates firm entry, leading to an increase in labor demand and wages, which in turn makes firm selection more stringent. Related to this is a large boost of the number of firms and of aggregate output, investment and employment.

Creative Destruction and Uncertainty

Available as a CEPR Discussion Paper 11296
Awarded the Daimler und Benz Stipendium (2014-2015)
Accepted at the Journal of the European Economic Association
[View abstract]

Uncertainty rises in recessions. But does uncertainty cause downturns or vice versa? This paper argues that uncertainty fluctuates endogenously in response to technology growth changes. In a firm dynamics model with endogenous technology adoption, faster technology growth widens the dispersion of firm-level productivity shocks, a benchmark uncertainty measure. Moreover, faster growth spurs a creative destruction process, generates a temporary downturn and renders uncertainty counter-cyclical. Estimates from structural VARs on U.S. data confirm the model's predictions. On average, shocks to technology growth explain 1/4 of the cyclical variation in uncertainty, and up to 2/3 around the "dot-com" bubble.

Lost Generations of Firms and Aggregate Labor Market Dynamics

Previously circulated under the title "Firm Age, Business Cycles and Aggregate Labor Market Dynamics (2011)"
Accepted at the Journal of Monetary Economics
[View abstract]

Can the unprecedented lack of startups during the U.S. Great Recession have persistently negative effects? While fewer firms hiring workers can mechanically reduce employment for many years, this may be offset by feedback effects on lower wages, slacker labor markets and higher profits. An estimated model of firm dynamics and frictional labor markets suggests that such feedback effects are too weak to offset the direct impact of fewer startups. Had firm entry remained constant during the Great Recession, output would have recovered 4–6 years earlier and unemployment would have been 0.5 percentage points lower even 10 years after the crisis.

Unemployment and the Labor Share

with Sephorah Mangin
Journal of Monetary Economics, 94, Arpil 2018
[View abstract]

The labor share fluctuates over the business cycle. To explain this behavior, we develop a novel model featuring direct competition between heterogeneous firms to hire workers. This simultaneously endogenizes both average match productivity and the division of output between workers and firms. In existing matches, wages partly reflect labor market conditions at the time of hiring. A positive TFP shock therefore reduces the aggregate labor share, making it counter-cyclical. However, greater competition and lower unemployment increase labor's share among new firms. As more firms enter, the aggregate labor share rises and eventually overshoots its initial level, as in the data.

The Growth Potential of Startups Over the Business Cycle

with Vincent Sterk
American Economic Review, 107 (10), 2017
[View abstract]

This paper shows that employment in cohorts of U.S. fims is strongly influenced by aggregate conditions at the time of their entry. Employment fluctuations of startups are pro-cyclical, they persist into later years and cohort-level employment variations are largely driven by differences in firm size, rather than the number of firms. An estimated general equilibrium firm dynamics model reveals that aggregate conditions at birth, rather than post-entry choices, drive the majority of cohort-level employment variation, by affecting the share of startups with high growth potential. In the aggregate, changes in startup conditions result in large slow-moving fluctuations in employment.

The Aggregate Matching Function and Job Search from Employment and Out of the Labor Force

Review of Economic Dynamics, 21, July 2016
[Appendix] [Matlab code]
[View abstract]

The majority of new jobs in the U.S. is filled by workers coming from employment or from out of the labor force (inactivity). Yet, because the number of job seekers in these groups is unobserved, they are often ignored in empirical labor market studies. This paper, instead, uses latent-variable techniques to estimate the aggregate matching function - a relation between hires, vacant jobs and job seekers - while considering searchers from unemployment, employment and inactivity. Importantly, the estimation allows for the (match) efficiency with which these three groups of searchers find jobs to vary on average and over time. This paper finds that almost half of the rise in U.S. unemployment during the Great Recession is explained by a drop in match efficiency of the unemployed. This contrasts sharply with previous studies which found match efficiency to be quantitatively unimportant.

Inefficient Continuation Decisions, Job Creation Costs, and the Cost of Business Cycles

with Wouter den Haan
Quantitative Economics, 5 (2), July 2014
[View abstract]

This paper develops a model according to which the costs of business cycles are nontrivial because they reduce the average level of output. The reason is an interaction between job creation costs and an agency problem. The agency problem triggers separations during economic downturns even though both the employer and the worker would be better off if the job was not discontinued, that is, affected jobs have strictly positive surplus values. Similarly, booms make it possible for more jobs to overcome the agency problem. These e ects do not offset each other, because business cycles reduce the expected job duration for these jobs. With positive job creation costs, business cycles then reduce the creation of valuable jobs and lower average activity levels. Considering a wide range of parameter values, we find estimates for the cost of business cycles ranging from 2.03% to 12.7% of GDP.

Match Efficiency and Firms' Hiring Standards

Journal of Monetary Economics, 62, March 2014
[View abstract]

During the last recession, new hires were lower than would be predicted by a standard matching function and the observed ratio of searching workers and firms. This paper first estimates U.S. match efficiency as an exogenous residual in the matching function using a simple search and matching model. It finds match efficiency to be pro-cyclical and to account for about 1/4 of unemployment increases during the most severe recessions. Second, this paper proposes a model with endogenous separations and firing costs that endogenizes match efficiency, which is driven by firms' hiring standards. The model can explain almost 1/2 of the variation in the initial estimate of match efficiency.

Institutional Conditions of Monetary Policy Conduct in the Czech Republic

Prague Economic Papers, 2, 2006

[View abstract]

This paper tries to assess the conditions under which the CNB operates. Using a basic framework suggested by Mishkin (2000), the aim is to find out whether the central bank is able to conduct high-quality monetary policy. First, general principles that central banks should follow to succeed in their pursuit of monetary goals are theoretically introduced. Then, these theoretical principles are looked at in the Czech context. Issues of the strictness and suitability of concrete monetary policy of the CNB will not be dealt with, rather institutional circumstances that potentially allow successful policy are at the centre of this paper. It is concluded that the CNB is functioning in a moderately good environment, but still much room for improvement does exist.

Other Publications

Startups and Young Firms in the Economy

in New Entrepreneurial Growth Agenda, Section 3, Kauffman Foundation, February 2016

Analysis of the Investment Cycle

Statistika, 6, 2006 (in Czech)

Monitoring and Analysis of the Business Cycle

with Slavoj Czesany and Lenka Machackova, Czech Statistical Office, 2006 (in Czech)

The Labor Market

in Analysis of Contexts of Macroeconomic Development of the Czech Republic in 2005, Czech Statistical Office, 2006 (in Czech)

Monitoring and Analysis of the Investment Cycle

Czech Statistical Office, 2006 (in Czech)

Gross Fixed Capital Formation

in Analysis of Contexts of Macroeconomic Development of the Czech Republic in 2005, Czech Statistical Office, 2006 (in Czech)


Inequality, Business Cycles, and Monetary-Fiscal Policy

by Bhandari, Evans, Golosov, Sargent, 2019 Money Macro Workshop, ECB, Germany

The Optimal Amount of Attention to Capital Income Risk

by Yin, 2018 T H E Workshop, Hohenheim, Germany

The Employment Effects of Corporate Tax Shocks: New Evidence and Some Theory

by Colciago, Lewis and Matyska, 2017 Cologne, Germany

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity

by Khan, Senga, Thomas, 2017, 48th Konstanz Seminar, Germany

Understanding the 30 year Decline in Business Dynamism: A General Equilibrium Approach

by Karahan, Pugsley, Sahin, 2015, New Developments in Business Cycle Analysis, Montreal, Canada

Surprise, Surprise - Measuring Firm-level Investment Innovations

by Bachmann, Elstner, Hristov, 2014, The European Crisis-Causes and Consequences, University of Bonn

Labor Market Reform and the Cost of Business Cycles

by Krebs, Scheffel, 2014, Summer Symposium in International Macroeconomics, Tarragona, Spain

Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects

by Hagedorn, Karahan, Manovskii, Mitman, 2013, Cologne Macro Workshop

Loss Aversion and the Assymetric Transmission of Monetary Policy

by Gaffeo, Petrella, Pfajfar, Santoro, 2012, Cologne Macro Workshop

Work in Progress

Hiring Gluts

with Benjamin Schoefer, (an earlier version) awarded the DFG Research Fellowship (2016-2017)

Ageing, Entrepreneurship and Macroeconomic Performance

with Marek Ignazsek, awarded the Modigliani Research Grant (2016-2017)