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CREDIT FRICTIONS AND FIRM DYNAMICS

Published online by Cambridge University Press:  28 September 2012

Zheng Zeng
Zheng Zeng*
Affiliation:
Bowling Green State University
*
Address correspondence to: Zheng Zeng, Department of Economics, Bowling Green State University, Bowling Green, OH 43403, USA; e-mail: zzeng@bgsu.edu.
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Abstract

In this paper I develop a dynamic stochastic general equilibrium model of credit frictions in which the production technology provides a U-shaped average cost curve, enabling endogenous solutions for firm size and quantity. Firms weigh the present value of future net revenues against the opportunity cost of staying in business in their entry or exit decisions. I find that credit frictions increase variable investment costs and result in a larger firm size and a smaller number of firms in the steady state. As the economy deviates from the steady state, however, the presence of credit frictions increases fluctuation in the number of firms, raising market entry during an economic upturn and market exit during a downturn. Also, I find that allowing free entry mitigates some of the effects of credit frictions due to macroeconomic fluctuations. In addition to the homogeneous-firm model, I examine the model when firms have heterogeneous access to credit and find that different credit access gives rise to different firm sizes in the steady state. Firms with easier access to credit become larger than those with less access to credit. Heterogeneous credit access also means that these two types of firms will respond differently to a common technology shock.

Keywords

Credit Market FrictionsCollateral ConstraintFirm SizeFirm HeterogeneityEntry and Exit
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 7 , October 2013 , pp. 1467 - 1495
Copyright
Copyright © Cambridge University Press 2012 

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