Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection

Sina T. Ates and Felipe Saffie
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Sina T. Ates: https://www.federalreserve.gov/econres/sina-t-ates.htm

No 1187, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We incorporate endogenous technical change into a real business cycle small open economy framework to study the productivity costs of sudden stops. In this economy, productivity growth is determined by the entry of new firms and the expansion decisions of incumbent firms. New firms are created after the implementation of business ideas, yet the quality of ideas is heterogeneous and good ideas are scarce. Selection of the most promising ideas gives rise to a trade-off between mass (quantity) and composition (quality) in the entrant cohort. Chilean plant-level data from the sudden stop triggered by the Russian sovereign default in 1998 confirm the main mechanism of the model, as firms born during the credit shortage are fewer, but better. The quantitative analysis shows that four years after the crisis, 12.5% of the output deviation from trend is due to permanent productivity losses. Distortions in the entry margin account for 40% of the loss, and the remainder is due to distortion in the expansion decisions of incumbents.

Keywords: Selection; Sudden Stop; Endogenous Growth; Firm Dynamics (search for similar items in EconPapers)
JEL-codes: F40 F41 F43 O11 O16 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2016-11
New Economics Papers: this item is included in nep-cis, nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection (2021)
Working Paper: Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1187

DOI: 10.17016/IFDP.2016.1187

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