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Credit Crunches and Credit Allocation in a Model of Entrepreneurship

Author

Listed:
  • Marco Bassetto

    (Federal Reserve Bank of Chicago)

  • Marco Cagetti

    (Board of Governors)

  • Mariacristina De Nardi

    (Federal Reserve Bank of Chicago)

Abstract

We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm-size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth. (Copyright: Elsevier)

Suggested Citation

  • Marco Bassetto & Marco Cagetti & Mariacristina De Nardi, 2015. "Credit Crunches and Credit Allocation in a Model of Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 53-76, January.
  • Handle: RePEc:red:issued:14-53
    DOI: 10.1016/j.red.2014.08.003
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    Cited by:

    1. Emin Dinlersoz & Henry Hyatt & Hubert Janicki, . "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    2. Emin Dinlersoz & Henry Hyatt & Hubert Janicki, . "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    3. repec:cen:wpaper:15-08 is not listed on IDEAS
    4. Gaillard, Alexandre & Kankanamge, Sumudu, 2018. "Entrepreneurship, Labor Market Mobility and the Role of Entrepreneurial Insurance," TSE Working Papers 18-929, Toulouse School of Economics (TSE), revised Feb 2019.
    5. Yuko Imura & Julia Thomas, 2015. "International Transmission of Credit Shocks in an Equilibrium Model with Production Heterogeneity," Staff Working Papers 15-19, Bank of Canada.
    6. Cui, Wei, 2016. "Monetary–fiscal interactions with endogenous liquidity frictions," European Economic Review, Elsevier, vol. 87(C), pages 1-25.
    7. repec:kap:enreec:v:70:y:2018:i:4:d:10.1007_s10640-017-0157-0 is not listed on IDEAS
    8. Hofbauer, Florian & Fehr, Hans, 2016. "Pension reform with entrepreneurial choice," Annual Conference 2016 (Augsburg): Demographic Change 145714, Verein für Socialpolitik / German Economic Association.
    9. Abad, José M. & Campos, Rodolfo G. & Bermejo, Vicente J., 2015. "How does easing liquidity constraints affect aggregate employment?," DEE - Working Papers. Business Economics. WB wb1504, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    10. repec:eee:corfin:v:52:y:2018:i:c:p:1-27 is not listed on IDEAS
    11. Francesco Manaresi & Filippo Scoccianti, 2017. "Battle scars. New firms’ capital, labor, and revenue growth during the double-dip recession," Questioni di Economia e Finanza (Occasional Papers) 390, Bank of Italy, Economic Research and International Relations Area.
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    13. Kalemli-Ozcan, Sebnem, 2018. "Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness," CEPR Discussion Papers 13337, C.E.P.R. Discussion Papers.
    14. repec:spr:intemj:v:13:y:2017:i:4:d:10.1007_s11365-017-0456-5 is not listed on IDEAS
    15. Josef Schroth, 2016. "Financial Crisis Interventions," Staff Working Papers 16-29, Bank of Canada.
    16. repec:eee:jmacro:v:56:y:2018:i:c:p:65-88 is not listed on IDEAS
    17. van den Bijgaart, Inge, 2016. "Essays in environmental economics and policy," Other publications TiSEM 298bee2a-cb08-4173-9fe1-8, Tilburg University, School of Economics and Management.
    18. Aaronson, Daniel & Hartley, Daniel & Mazumder, Bhashkar, 2017. "The Effects of the 1930s HOLC “Redlining” Maps," Working Paper Series WP-2017-12, Federal Reserve Bank of Chicago.
    19. Katya Kartashova, 2014. "Private Equity Premium Puzzle Revisited," American Economic Review, American Economic Association, vol. 104(10), pages 3297-3334, October.
    20. Benjamin Pugsley & Sebastian Dyrda, 2017. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2017 Meeting Papers 1463, Society for Economic Dynamics.
    21. Merlin, Giovanni Tondin, 2018. "Entrepreneurship, financial frictions and the welfare gains of business cycles," Textos para discussão 484, FGV EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    22. Oleg Itskhoki & Benjamin Moll, 2014. "Optimal Development Policies with Financial Frictions," NBER Working Papers 19994, National Bureau of Economic Research, Inc.
    23. Bassetto, Marco & Benzoni, Luca & Serrao, Trevor, 2016. "The Interplay Between Financial Conditions and Monetary Policy Shocks," Working Paper Series WP-2016-11, Federal Reserve Bank of Chicago.
    24. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-47, Board of Governors of the Federal Reserve System (US).

    More about this item

    Keywords

    Credit crunches; Credit allocation; Entrepreneurship; Borrowing constraints; Wealth inequality;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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