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Firm Entry under Financial Frictions

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  • Miguel Casares
  • Jean-Christophe Poutineau

Abstract

How does a general-equilibrium model behave when incorporating competitive firm entry that requires external finance? After conducting a steady-state analysis, we reach 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, the dynamics of firm creation and destruction amplify the 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.
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Suggested Citation

  • Miguel Casares & Jean-Christophe Poutineau, 2013. "Firm Entry under Financial Frictions," Review of Development Economics, Wiley Blackwell, vol. 17(2), pages 301-318, May.
  • Handle: RePEc:bla:rdevec:v:17:y:2013:i:2:p:301-318
    DOI: 10.1111/rode.2013.17.issue-2
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    References listed on IDEAS

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    1. 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.
    2. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    4. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
    5. Goodfriend, Marvin & McCallum, Bennett T., 2007. "Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1480-1507, July.
    6. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
    7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    8. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-585, May.
    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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    Cited by:

    1. Poutineau, Jean-Christophe & Vermandel, Gauthier, 2015. "Financial frictions and the extensive margin of activity," Research in Economics, Elsevier, vol. 69(4), pages 525-554.

    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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