Credit Frictions and the Cleansing Effect of Recessions.

53 Pages Posted: 10 Mar 2016

See all articles by Sophie Osotimehin

Sophie Osotimehin

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Paris School of Economics (PSE); Université Paris I Panthéon-Sorbonne

Francesco Pappadà

Banque de France; Paris School of Economics (PSE)

Date Written: March 2016

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.

JEL Classification: E32, E44, D21.

Suggested Citation

Osotimehin, Sophie and Pappadà, Francesco, Credit Frictions and the Cleansing Effect of Recessions. (March 2016). Banque de France Working Paper No. 583, Available at SSRN: https://ssrn.com/abstract=2743132 or http://dx.doi.org/10.2139/ssrn.2743132

Sophie Osotimehin (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Université Paris I Panthéon-Sorbonne

17, rue de la Sorbonne
Paris, IL 75005
France

Francesco Pappadà

Banque de France ( email )

Paris
France

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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