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Credit frictions and the cleansing effect of recessions

Sophie Osotimehin and 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: E32 E44 D21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2016
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Related works:
Journal Article: Credit Frictions and The Cleansing Effect of Recessions (2017) Downloads
Working Paper: Credit frictions and the cleansing effect of recessions Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:583

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