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Credit Frictions and The Cleansing Effect of Recessions

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  • Sophie Osotimehin
  • Francesco Pappadà

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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Suggested Citation

  • Sophie Osotimehin & Francesco Pappadà, 2017. "Credit Frictions and The Cleansing Effect of Recessions," Economic Journal, Royal Economic Society, vol. 127(602), pages 1153-1187, June.
    • Handle: RePEc:wly:econjl:v:127:y:2017:i:602:p:1153-1187
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    File URL: http://hdl.handle.net/10.1111/ecoj.2017.127.issue-602
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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