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All you Need is Loan. Credit Market Frictions and the Exit of Firms in Recessions

Listed author(s):
  • Sophie Osotimehin


  • Francesco Pappada


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    This paper investigates how credit market frictions may alter business cycle dynamics bymodifying the exit behavior of firms. We show that the extensive margin yields a significantamplification mechanism as credit frictions increase the number of firms vulnerable to afall in aggregate productivity. Unlike the standard financial accelerator, this amplificationchannel does not hinge on the sensitivity of firms’ net worth to aggregate shocks. Moreover,though credit market frictions distort the selection of exiting firms, the average idiosyncraticproductivity of firms during recessions rises more than in a frictionless economy.

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    Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-51.

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    Length: 43
    Date of creation: 2010
    Handle: RePEc:crs:wpaper:2010-51
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