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Uncertainty shocks and firm creation: Search and monitoring in the credit market

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  • Brand, Thomas
  • Isoré, Marlène
  • Tripier, Fabien

Abstract

We develop a business cycle model where endogenous firm creation stems from two credit market frictions. First, entrepreneurs search for a lending relationship with a bank. Second, an optimal debt contract with monitoring is implemented. We analyze the interplay between both frictions, and embed it into an otherwise standard business cycle model which we estimate with Bayesian techniques. We find that uncertainty shocks are a prime contributor to business cycle fluctuations in the US, not only for macro-financial aggregates but also for firm creation. Moreover, we point out that the credit search friction dampens the financial accelerator mechanism because default may imply the end of the lending relationship.

Suggested Citation

  • Brand, Thomas & Isoré, Marlène & Tripier, Fabien, 2019. "Uncertainty shocks and firm creation: Search and monitoring in the credit market," Journal of Economic Dynamics and Control, Elsevier, vol. 99(C), pages 19-53.
    • Handle: RePEc:eee:dyncon:v:99:y:2019:i:c:p:19-53
    DOI: 10.1016/j.jedc.2018.11.003
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Uncertainty Shocks and Firm Dynamics: Search and Monitoring in the Credit Market
      by Christian Zimmermann in NEP-DGE blog on 2017-12-23 10:30:33

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    Cited by:

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    3. Hailiang Zou & Ruijing Wang & Guoyou Qi, 2023. "The Response of CSR to Economic Policy Uncertainty: Evidence from China," Sustainability, MDPI, vol. 15(17), pages 1-19, August.
    4. Badar Nadeem Ashraf, 2021. "Is Economic Uncertainty a Risk Factor in Bank Loan Pricing Decisions? International Evidence," Risks, MDPI, vol. 9(5), pages 1-17, April.
    5. Stefano Fasani & Haroon Mumtaz & Lorenza Rossi, 2023. "Monetary Policy and Firm Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 278-296, January.
    6. Rossi, Lorenza, 2019. "The overshooting of firms’ destruction, banks and productivity shocks," European Economic Review, Elsevier, vol. 113(C), pages 136-155.
    7. Caggiano, Giovanni & Castelnuovo, Efrem & Delrio, Silvia & Kima, Richard, 2021. "Financial uncertainty and real activity: The good, the bad, and the ugly," European Economic Review, Elsevier, vol. 136(C).
    8. Rossi, Lorenza & Zanetti Chini, Emilio, 2021. "Temporal disaggregation of business dynamics: New evidence for U.S. economy," Journal of Macroeconomics, Elsevier, vol. 69(C).
    9. Li, Li & Chen, Hongyi & Xiang, Jingjie, 2023. "Oil price uncertainty, financial distress and real economic activities: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Uncertainty; Financial frictions; Search and matching; Business cycle; Firm creation; Firm dynamics;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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