Credit frictions and the cleansing effect of recessions

Sophie Osotimehin and F. Pappad
Authors registered in the RePEc Author Service: Francesco Pappadà

Working papers from Banque de France

Abstract: Recessions are conventionally considered as times when the least productive firms are driven out of the market. How do credit frictions affect this cleansing effect of recessions? We build and calibrate a model of firm dynamics with credit frictions and endogenous entry and exit to investigate this question. We find that there is a cleansing effect of recessions in the presence of credit frictions, despite their effect on the selection of exiting and entering firms. This result holds true regardless of the nature of the recession: average firm-level productivity rises following a negative aggregate productivity shock, as well as following a negative financial shock. The intensity of the cleansing effect of recessions is however lower in the presence of credit frictions, especially when the recession is driven by a financial shock.

Keywords: cleansing; business cycles; firm dynamics; credit frictions. (search for similar items in EconPapers)
JEL-codes: D21 E32 E44 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2016
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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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
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:583

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