Credit frictions and the cleansing effect of recessions

Sophie Osotimehin and Francesco Pappadà

Virginia Economics Online Papers from University of Virginia, Department of Economics

Abstract: 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

Keywords: cleansing; business cycles; rm dynamics; credit frictions (search for similar items in EconPapers)
JEL-codes: D21 E32 E44 (search for similar items in EconPapers)
Pages: 34 pages
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Credit Frictions and The Cleansing Effect of Recessions (2017)
Working Paper: Credit frictions and the cleansing effect of recessions (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:vir:virpap:403

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