Financial Frictions and the Extensive Margin of Activity

This paper evaluates the role of nancial intermediaries, such as banks, on the extensive margin of activity. We build a DSGE model that combines the endogenous determination of the number of rms operating on the goods market with nancial frictions through a financial accelerator mechanism. We more particularly account for the fact that the creation of a new activity partly requires loans to fi nance spendings during the setting period. This model is estimated on US data between 1993Q1 to 2012Q3. We get three main results. First, fi nancial frictions play a key role in determining the number of new fi rms. Second, in contrast with real macroeconomic shocks (where investment in existing production lines and the creation of new firms move in the opposite direction), financial shocks have a cumulative e ffect on the two margins of activity, amplifying macroeconomic fluctuations. Third, the critical role of financial factors is mainly observed in the period corresponding to the creation of new fi rms. In the long run, the variance of the e ffective entry share is almost explained by supply shocks.