Endogenous Firms' Exit, Inefficient Banks and Business Cycle Dynamics

Lorenza Rossi

No 99, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: I consider a NK-DSGE model with endogenous firms' exit and entry together with a monopolistic competitive banking sector, where defaulting firms do not repay loans to banks. I show that the exit margin is an important shock transmission channel. It implies: i) an endogenous countercyclical number of firms destruction; ii) an endogenous countercyclical bank markup and spread. The interaction between i) and ii) generates a stronger propagation mechanism with respect to a model with efficient banks. Compared to a model with exogenous exit the model generates a correlation between output and firms' entry closer to data.

Keywords: firms' endogenous exit; firms dynamics; monopolistic banking; inefficient financial markets; countercyclical bank markup; interest rate spread. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-03
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Endogenous Firms' ?Exit, Inefficient Banks and Business Cycle Dynamics (2015)
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