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Credit frictions and the cleansing effect of recessions

  • 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
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Handle: RePEc:vir:virpap:403
Contact details of provider: Web page: http://www.virginia.edu/economics/home.html

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