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Credit frictions and the cleansing effect of recessions

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  • Sophie Osotimehin

    ()

  • Francesco Pappada

    ()

Abstract

Recessions are conventionally considered as times when the least productive rms are driven out of the market. Do credit frictions hamper this cleansing e ect of recessions? We build and calibrate a model of rm dynamics with endogenous exit and credit frictions to investigate this question. We nd that, despite their distortionary e ect on the selection of exiting rms, credit frictions do not reverse the cleansing e ect of recession. Average idiosyncratic productivity rises following an adverse aggregate shock. Our results also suggest that recessions have a modest impact on average productivity whatever the level of credit frictions

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap403.pdf
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Bibliographic Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 403.

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Length: 34 pages
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Handle: RePEc:vir:virpap:403

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Web page: http://www.virginia.edu/economics/home.html

Related research

Keywords: cleansing; business cycles; rm dynamics; credit frictions;

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References

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  1. Massimo Del Gatto & Gianmarco I.P. Ottaviano & Marcello Pagnini, 2007. "Openess to trade and industry cost dispersion: Evidence from a panel of Italian firms," Temi di discussione (Economic working papers) 635, Bank of Italy, Economic Research and International Relations Area.
  2. Barlevy, Gadi, 2003. "Credit market frictions and the allocation of resources over the business cycle," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1795-1818, November.
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  8. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  9. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
  10. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  11. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
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  1. Credit frictions and the cleansing effect of recessions
    by Christian Zimmermann in NEP-DGE blog on 2013-05-05 17:15:39
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Cited by:
  1. Sophie Osotimehin, 2013. "Aggregate productivity and the allocation of resources over the business cycle," Virginia Economics Online Papers 404, University of Virginia, Department of Economics.
  2. Lucia Foster & Cheryl Grim & John Haltiwanger, 2013. "Reallocation In The Great Recession: Cleansing Or Not?," Working Papers 13-42, Center for Economic Studies, U.S. Census Bureau.

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