Credit frictions and the cleansing effect of recessions

By Sophie Osotimehin and Francesco Pappadà

http://d.repec.org/n?u=RePEc:vir:virpap:403&r=dge

Recessions are conventionally considered as times when the least productive firms are driven out of the market. Do credit frictions hamper this cleansing effect of recessions? We build and calibrate a model of firm dynamics with endogenous exit and credit frictions to investigate this question. We find that, despite their distortionary effect on the selection of exiting firms, credit frictions do not reverse the cleansing effect of recession. Average idiosyncratic productivity rises following an adverse aggregate shock. Our results also suggest that recessions have a modest impact on average productivity whatever the level of credit frictions

Bernanke-Gertler meets Schumpeter, and neither seems to matter much. I was expecting the cleansing during recessions to be more important. As for frictions, it was not clear which way it would go, as more productive firms may face fewer frictions but frictions become more important in recessions, or something like that. In any case, it turns out that the popular claim that an occasional recession is good for the economy is not that true.

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 44 other followers

%d bloggers like this: