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Credit frictions and the cleansing effect of recessions

Listed author(s):
  • Sophie Osotimehin

    ()

  • Francesco Pappada

    ()

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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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap403.pdf
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Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 403.

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Length: 34 pages
Date of creation:
Handle: RePEc:vir:virpap:403
Contact details of provider: Web page: http://www.virginia.edu/economics/home.html

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  1. Gian Luca Clementi & Dino Palazzo, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," Working Paper Series 27_10, The Rimini Centre for Economic Analysis.
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  4. Lucia Foster & Cheryl Grim & John Haltiwanger, 2013. "Reallocation in the Great Recession: Cleansing or Not?," NBER Chapters, in: Labor Markets in the Aftermath of the Great Recession, pages 293-331 National Bureau of Economic Research, Inc.
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  17. Fisher, Jonas D M, 1999. "Credit Market Imperfections and the Heterogeneous Response of Firms to Monetary Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 187-211, May.
  18. Min Ouyang, 2005. "The Scarring Effect of Recessions," Working Papers 050609, University of California-Irvine, Department of Economics.
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