Financial Markets, Creation and Liquidation of Firms and Aggregate Dynamics
AbstractThe evidence indicates that small and young firms respond differently to shocks in the financial markets than larger, older firms. Moreover, gross job flows indicate that the differences are mostly in the activation and liquidation decisions. In this dissertation we examine the impact of shocks that affect the economy via the interest rates and explore the transmission on the cross-section of active firms. In the model, due to the limited commitment of entrepreneurs, credit constraints arise endogenously. The solution of the optimal infinite horizon contract between banks and firms turns out to be very simple. Initially firms accumulate net worth as fast as possible and their size and survival probabilities grow over time. We provide a decentralization in which entrepreneurs trade in one-period securities, rationalizing solvency and borrowing constraints and making it natural to link the collateral of the entrepreneur with the size and age of the firm. The results are consistent with observed entry and exit behavior. The larger the collateral of firms, the less sensitive to interest rates is the exit probability, i.e. small, younger firms are more sensitive to interest rates than that of larger, more mature firms. With respect to entry, with higher interest rates, less firms are created, and a higher productivity is needed for activation, purifying the pool of entrants and increasing future survival. However, given their characteristics, firms created during recessions face tighter credit constraints and have lower survival probabilities. The model is qualitatively consistent with the evidence. Real interest rates comove negatively with aggregate output, gross creation, net growth, of jobs and firms, and positively with flows of job and firm destruction. With the frictions in the creation of firms, the model also compatible with the volatility of destruction flows being much larger than that of creation flows. The response in the mass of active firms provides a propagation mechanism. Output dynamics is asymmetric as recessions are shorter than expansions. Additionally, the destruction series are highly concentrated in short periods of times.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1648.
Date of creation: 01 Aug 2000
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Radim Bohacek & Hugo Rodriguez Mendizabal, 2004.
"Credit markets and the propagation of monetary policy shocks,"
CERGE-EI Working Papers
wp244, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- RADIM BOHÁČEK & HUGO RODRÍGUEZ MENDIZÁBAL, 2007. "Credit Markets and the Propagation of Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1429-1455, 09.
- Radim Bohacek & Hugo Rodriguez Mendizabal, 2003. "Credit Markets and the Propagation of Monetary Policy Shocks," UFAE and IAE Working Papers 599.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Alexander Monge-Naranjo, 2009. "Entrepreneurship and firm heterogeneity with limited enforcement," Annals of Finance, Springer, vol. 5(3), pages 465-494, June.
- Ben R. Craig & Joseph G. Haubrich, 2000.
"Gross loan flows,"
0014, Federal Reserve Bank of Cleveland.
- Christiano, Lawrence J. & Gust, Christopher & Roldos, Jorge, 2004.
"Monetary policy in a financial crisis,"
Journal of Economic Theory,
Elsevier, vol. 119(1), pages 64-103, November.
- Lawrence J. Christiano & Christopher Gust & Jorge Roldos, 2002. "Monetary policy in a financial crisis," Working Paper Series WP-02-05, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Christopher Gust & Jorge Roldos, 2002. "Monetary policy in a financial crisis," Working Paper 0204, Federal Reserve Bank of Cleveland.
- Lawrence J. Christiano & Christopher Gust & Jorge Roldos, 2002. "Monetary Policy in a Financial Crisis," NBER Working Papers 9005, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.