Highlights :

• A striking feature of the Great Recession in the US is the sharp drop in firm creation in 2008-2010 and its following slow recovery.
• We develop a model with two financial frictions, search and monitoring on the credit market, to study the role of uncertainty shocks in the firm creation process.
• Uncertainty shocks in the financial sector turn out to be a major business cycle contributor of both macro-?nancial aggregates and ?rm dynamics.
• Uncertainty shocks explain most of the drop in firm creation and output during the Great Recession.

 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.

 Keywords : Uncertainty | Financial frictions | Search and matching | Business cycle | Firm creation | Firm dynamics

 JEL : D8, E3, E4, E5


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