All you Need is Loan. Credit Market Frictions and the Exit of Firms in Recessions

Sophie Osotimehin and Francesco Pappada
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Sophie Osotimehin: Crest
Francesco Pappada: Crest

No 2010-51, Working Papers from Center for Research in Economics and Statistics

Abstract: This paper investigates how credit market frictions may alter business cycle dynamics bymodifying the exit behavior of firms. We show that the extensive margin yields a significantamplification mechanism as credit frictions increase the number of firms vulnerable to afall in aggregate productivity. Unlike the standard financial accelerator, this amplificationchannel does not hinge on the sensitivity of firms’ net worth to aggregate shocks. Moreover,though credit market frictions distort the selection of exiting firms, the average idiosyncraticproductivity of firms during recessions rises more than in a frictionless economy.

Pages: 43
Date: 2010
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