Financial Fragility, Patterns of Firms' Entry and Exit and Aggregate Dynamics

32 Pages Posted: 22 Nov 2000

See all articles by Domenico Delli Gatti

Domenico Delli Gatti

Università Cattolica del Sacro Cuore

Marco Gallegati

Polytechnic University of Marche - Faculty of Economics

Antonio Palestrini

Universita di Teramo

Gianfranco Giulioni

Universita' Politecnica delle Marche, Ancona - Department of Economics

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Abstract

In macroeconomic models with financial constraints (see, for instance, Greenwald and Stiglitz, 1993; Bernanke, Gertler and Gilchrist,1998; Kiyotaki and Moore,1997) firms' supply decisions depend upon the degree of financial robustness/fragility, which is identifed and measured in different ways. In the theoretical framework put forward by Greenwald and Stiglitz (GS hereafter), for example, financial fragility is due to the presence of bankruptcy risk. GS implicitly assume, however, that the number of firms is constant. In this paper we abandon the one-to-one replacement assumption and allow for an unconstrained turnover of firms. In particular we exploit the presence of bankruptcy risk in a theoretical framework a la Greenwald-Stiglitz (Delli Gatti, Gallegati and Palestrini, 2000) to model an endogenous flow of exiting firms. As to the flow of entrants, we assume that it is influenced by current macroeconomic conditions (summarized by the number of surviving, non-bankrupt firms) and by stochastic factors. This entry-exit pattern of industrial dynamics will affect the evolution of the distribution of firms according to the degree of financial robustness/fragility which in turn will affect aggregate outcomes. In our opinion, in fact, firms' heterogeneity plays a crucial role in determining the macroeconomic performance.

Suggested Citation

Delli Gatti, Domenico and Gallegati, Marco and Palestrini, Antonio and Giulioni, Gianfranco, Financial Fragility, Patterns of Firms' Entry and Exit and Aggregate Dynamics. Available at SSRN: https://ssrn.com/abstract=248108 or http://dx.doi.org/10.2139/ssrn.248108

Domenico Delli Gatti

Università Cattolica del Sacro Cuore ( email )

LArgo Gemelli 1
Milan, 20123
Italy

Marco Gallegati (Contact Author)

Polytechnic University of Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Antonio Palestrini

Universita di Teramo ( email )

Via R. Balzarini 1, Località Colleparco
I-64124 Teramo
Italy
+39 0733 773473 (Phone)
+39 0861 266665 (Fax)

Gianfranco Giulioni

Universita' Politecnica delle Marche, Ancona - Department of Economics ( email )

Piazzale Martelli 8
Ancona, 18039
Italy
+39 071 2207110 (Phone)
+39 071 2207102 (Fax)

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