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Credit frictions and the cleansing effect of recessions

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  • S. Osotimehin
  • F. Pappadà

Abstract

Recessions are conventionally considered as times when the least productive firms are driven out of the market. How do credit frictions affect this cleansing effect of recessions? We build and calibrate a model of firm dynamics with credit frictions and endogenous entry and exit to investigate this question. We find that there is a cleansing effect of recessions in the presence of credit frictions, despite their effect on the selection of exiting and entering firms. This result holds true regardless of the nature of the recession: average firm-level productivity rises following a negative aggregate productivity shock, as well as following a negative financial shock. The intensity of the cleansing effect of recessions is however lower in the presence of credit frictions, especially when the recession is driven by a financial shock.

Suggested Citation

  • S. Osotimehin & F. Pappadà, 2016. "Credit frictions and the cleansing effect of recessions," Working papers 583, Banque de France.
  • Handle: RePEc:bfr:banfra:583
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    References listed on IDEAS

    as
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Costs of recession
      by chris in Stumbling and Mumbling on 2019-07-17 13:03:49

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    Cited by:

    1. Rahul Mukherjee & Christian Proebsting, 2015. "Survival of the Fittest: Corporate Control and the Cleansing Effect of Financial Crises," IHEID Working Papers 20-2015, Economics Section, The Graduate Institute of International Studies, revised 01 Oct 2015.
    2. Elisa Gamberoni & Claire Giordano & Paloma Lopez-Garcia, 2016. "Capital and labour (mis)allocation in the euro area: Some stylized facts and determinants," Questioni di Economia e Finanza (Occasional Papers) 349, Bank of Italy, Economic Research and International Relations Area.
    3. Andres Kuusk & Karsten Staehr & Uku Varblane, 2015. "Sectoral change and labour productivity growth during boom, bust and recovery," Bank of Estonia Working Papers wp2015-2, Bank of Estonia, revised 30 Dec 2015.
    4. V. Grossmann-Wirth & M. Vari, 2016. "Exiting low interest rates in a situation of excess liquidity: the experience of the Fed," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 5-14, Autumn.
    5. Cristina Fernández & Roberta García & Paloma Lopez-Garcia & Benedicta Marzinotto & Roberta Serafini & Juuso Vanhala & Ladislav Wintr, 2017. "Firm growth in Europe: An overview based on the COMPNET labour module," BCL working papers 107, Central Bank of Luxembourg.
    6. In Hwan Jo & Tatsuro Senga, 2019. "Aggregate Consequences of Credit Subsidy Policies: Firm Dynamics and Misallocation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 68-93, April.
    7. Daniel A. Dias & Carlos Robalo Marques, 2019. "Every Cloud has a Silver Lining: Cleansing Effects of the Portuguese Financial Crisis," International Finance Discussion Papers 1250, Board of Governors of the Federal Reserve System (U.S.).
    8. Ursel Baumann & Melina Vasardani, 2016. "The slowdown in US productivity growth - what explains it and will it persist?," Working Papers 215, Bank of Greece.
    9. Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
    10. J. Morenas & B. Rudelle, 2016. "Money and its counterparts in France and in the euro area," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 25-34, Autumn.
    11. Gigout, Timothee, 2019. "Firm dynamics in an global and uncertain economy," MPRA Paper 96569, University Library of Munich, Germany, revised 16 Oct 2019.
    12. Antoni, Manfred & Koetter, Michael & Müller, Steffen & Sondershaus, Talina, 2019. "Do asset purchase programmes shape industry dynamics? Evidence from the ECB's SMP on plant entries and exits," IWH Discussion Papers 12/2019, Halle Institute for Economic Research (IWH).
    13. V. Bignon & F. Boissay & C. Cahn & L.-M. Harpedanne de Belleville, 2016. "Extended eligibility of credit claims for Eurosystem refinancing Consequences for the supply of credit to companies," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 15-23, Autumn.
    14. Lucia Foster & Cheryl Grim & John Haltiwanger, 2016. "Reallocation in the Great Recession: Cleansing or Not?," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 293-331.
    15. In Hwan Jo & Tatsuro Senga, 2019. "Aggregate Consequences of Credit Subsidy Policies: Firm Dynamics and Misallocation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 68-93, April.
    16. Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
    17. C. Guette-Khiter, 2016. "Non-resident holdings of French CAC 40 companies at end-2015," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 35-46, Autumn.
    18. Thomas Url, 2018. "Die Folgen staatlicher Wechselbürgschaften und Beteiligungsgarantien für Inlandsbeschäftigung und Leistungsbilanz," WIFO Studies, WIFO, number 61057, December.
    19. Rafael Cezar & Timothée Gigout & Fabien Tripier, 2020. "Cross-border Investments and Uncertainty Firm-level Evidence," Working Papers 2020-03, CEPII research center.
    20. UESUGI Iichiro & HOSONO Kaoru & MIYAKAWA Daisuke & ONO Arito & UCHIDA Hirofumi, 2018. "Reallocation of Tangible Assets and Productivity," Discussion papers 18048, Research Institute of Economy, Trade and Industry (RIETI).
    21. A. Berthou, 2016. "Current account adjustments and productivity dynamics in Europe during the crisis," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 59-70, Autumn.
    22. Joao Ayres & Gajendran Raveendranathan, 2018. "The Firm Dynamics of Business Cycles," Department of Economics Working Papers 2018-16, McMaster University.
    23. R. Cezar, 2016. "France’s trade integration measured in value added," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 47-58, Autumn.
    24. Mahieu, Jeroen, 2020. "Creative Destruction? Local Business Conditions and the Earnings of Employees at Startups," MPRA Paper 98557, University Library of Munich, Germany.

    More about this item

    Keywords

    cleansing; business cycles; firm dynamics; credit frictions.;

    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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