Productivity Shocks and Uncertainty Shocks in a Model with Endogenous Firms Exit and Inefficient Banks

We consider a NK-DSGE model with endogenous firms' creation and destruction together with monopolistic competitive banks, where defaulting ?firms do not repay loans to banks. This framework implies: i) an endogenous and countercyclical number of firms destruction; ii) an endogenous and countercyclical bank markup. We study the effects of a shock to both the level and the volatility of the aggregate productivity. In response to a level shock, the interaction between i) and ii) generates a stronger propagation mechanism with respect to a model with exogenous exit and to a model with efficient banks. Remarkably, our model shows that a shock to the volatility of productivity, referred as an uncertainty shock, is recessionary. It implies a decline in firms’ creation, an increase in firms' destruction and an increase in banks’ markup. Estimating a small BVAR we find that our theoretical results are well supported by the empirical responses to uncertainty shocks.