Firm entry, credit shocks and business cycles

Abstract

In this thesis, we investigate whether, modelling firm dynamics together with credit markets in a two country frame, can provide additional information on international real business cycles in matching certain moments and explain other stylized statistics on business entry. Our motivation is the fact that, in the latest financial crisis, firm entry behavior is quite different between high income and low income countries. Solution of the model is provided with both productivity and credit shocks. Both kinds of shocks match a subset of stylized international business cycle facts. Plus in both kinds of shocks model exhibits the fact that volatility of new entrant firms are higher than incumbent ones. We show that credit shocks are better at explaining highly volatile business cycles in financially less developed countries. In the existence of country-specific credit shocks we observe contagion of crisis, comovements across countries do only exist with global credit shocks. We find out that the firm entry behaviour seen in latest financial crisis that financially developed countries has more volatile firm entry, is only possible with global shocks.