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All you Need is Loan. Credit Market Frictions and the Exit of Firms in Recessions

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  • Sophie Osotimehin

    (Crest)

  • Francesco Pappada

    (Crest)

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    Abstract

    This paper investigates how credit market frictions may alter business cycle dynamics bymodifying the exit behavior of firms. We show that the extensive margin yields a significantamplification mechanism as credit frictions increase the number of firms vulnerable to afall in aggregate productivity. Unlike the standard financial accelerator, this amplificationchannel does not hinge on the sensitivity of firms’ net worth to aggregate shocks. Moreover,though credit market frictions distort the selection of exiting firms, the average idiosyncraticproductivity of firms during recessions rises more than in a frictionless economy.

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    Bibliographic Info

    Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-51.

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    Length: 43
    Date of creation: 2010
    Date of revision:
    Handle: RePEc:crs:wpaper:2010-51

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    Cited by:
    1. Marco Pagano & Giovanni Pica, 2011. "Finance and Employment," CSEF Working Papers 283, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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