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This paper provides evidence on rm dynamics in response to policy uncertainty shocks. Using the EPU and the MPU indices as measures of policy uncertainty and sectoral data on establishments births and deaths, the paper shows that firms' entry and exit are both procyclical in response to policy uncertainty shocks. Remarkably, firms exit counteracts the negative e¤ect of policy uncertainty on economic activity and contributes to speed up the recovery. These results hold both for the total private sector and the majority of the industries in the US. Further, the paper shows that while non-policy uncertainty shocks play a major role in explaining business cycle movements, the contribution of policy uncertainty is minor in line with Born and Pfeifer (2014) and potentially explained by the different behavior of firms exit in response to the two types of uncertainty. To address the empirical evidence, we consider a DSGE model with heterogeneous firms and endogenous firm dynamics.
