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

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

Gianfranco Giulioni

Universita' Politecnica delle Marche, Ancona - Department of Economics

Antonio Palestrini

Universita di Teramo

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Abstract

In this paper, extending the framework originally put forward by Greenwaldand Stiglitz (1988, 1990, 1993), we have developed a theoretical framework in which the financial conditions affect the capital accumulation decisions of the firm. In contrast to Greenwald and Stiglitz we allow for an unconstrained turnover of firms. In particular we will allow for an endogenously determined flow of exiting firms (through bankruptcy) and a stochastic flow of entrant firms.This entry-exit process will affect the dynamics of the distribution of firms which are differentiated by the equity ratio,i.e. the ratio of net worth to the capital stock. Aggregate variables (the capital stock, the equity base and aggregate output) can be interpreted as the outcome of a dynamic process which involves persistent financial heterogeneity and firms' turnover. It turns out that changes in financial conditions play an important role in determining output fluctuations. The ratio of financially fragile (Ponzi and speculative) firms to hedge units increases during the ascending phase of the business cycle as predicted in Minsky's financial instability hypothesis. We may also note that the entry and exit rates are strongly correlated, a prediction which is broadly consistent with the empirical evidence for advanced market economies.

JEL Classification: E170, E220

Suggested Citation

Delli Gatti, Domenico and Gallegati, Marco and Giulioni, Gianfranco and Palestrini, Antonio, Financial Fragility, Patterns of Firms' Entry and Exit and Aggregate Dynamics. Available at SSRN: https://ssrn.com/abstract=249269

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

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)

Antonio Palestrini

Universita di Teramo ( email )

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

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