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Financial Fragility, Heterogeneous Firms and the Cross Section of the Business Cycle

  • Holly, S.
  • Santoro, E.

There is growing evidence that the cross section of the growth rate of firms is subject to systematic distortions at business cycle frequencies. In this paper we briefly review this evidence and then offer a theoretical model that incorporates nonlinearities in the way in which firms respond to aggregate and ideosyncratic shocks. We are able to replicate the most commonly found regularity - skewness in the cross section is counter-cyclical - and show that the strength of this relationship varies with the extent of financial fragility.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0846.

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Date of creation: Sep 2008
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Handle: RePEc:cam:camdae:0846
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