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Firm Entry under Financial Frictions

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  • Miguel Casares
  • Jean-Christophe Poutineau

Abstract

Introducing both endogenous firm entry and a requirement for external finance in a general-equilibrium model leads to three main results. First, the financial constraint has contractionary effects on both equity investment and the labor supply as they are inversely related to the marginal finance cost. Second, net firm creation amplifies the steady-state impact of changes in either productivity or banking efficiency due to procyclical firm entry. Third, a higher elasticity of substitution (that implies a lower mark-up) cuts the number of firms and makes aggregate output fall in steady state, opposite to standard models with constant number of firms.

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File URL: http://hdl.handle.net/10.1111/10.1111/rode.2013.17.issue-2
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 17 (2013)
Issue (Month): 2 (05)
Pages: 301-318

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Handle: RePEc:bla:rdevec:v:17:y:2013:i:2:p:301-318

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  1. Bilbiie, Florin Ovidiu & Ghironi, Fabio & Melitz, Marc J, 2011. "Endogenous Entry, Product Variety, and Business Cycles," CEPR Discussion Papers 8564, C.E.P.R. Discussion Papers.
  2. Casares Miguel & Poutineau Jean-Christophe, 2011. "Short-Run and Long-Run Effects of Banking in a New Keynesian Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-41, May.
  3. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
  4. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-85, May.
  5. Marvin Goodfriend & Bennett T. McCallum, 2007. "Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration," NBER Working Papers 13207, National Bureau of Economic Research, Inc.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  7. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  8. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
  9. Gilchrist, Simon, 2007. "Comment on: Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1508-1514, July.
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