XXV Edition

1-2 December 2016"

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

Rossi Lorenza, University of Pavia

We consider a NK-DSGE model with endogenous Örmsí creation and destruction together with monopolistic competitive banks, where defaulting Örms do not repay loans to banks. This framework implies: i) an endogenous and countercyclical number of Örms destruction; ii) an endogenous and countercyclical bank markup. We study the e§ects 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 e¢cient 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 Örmsí creation, an increase in Örmsí destruction and an increase in banksí markup. Estimating a small BVAR we Önd that our theoretical results are well supported by the empirical responses to uncertainty shocks

Area: Monetary Policy and Central Banking

Keywords: Firms endogenous exit, countercyclical bank markup, productivity shocks, uncertainty shock, BVAR.

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