Credit frictions and the cleansing effect of recessions

Recessions are conventionally considered as times when the least productive rms are driven out of the market. Do credit frictions hamper this cleansing eect of recessions? We build and calibrate a model of rm dynamics with endogenous exit and credit frictions to investigate this question. We nd that, despite their distortionary eect on the selection of exiting rms, credit frictions do not reverse the cleansing eect of recession. Average idiosyncratic productivity rises following an adverse aggregate shock. Our results also suggest that recessions have a modest impact on average productivity whatever the level of credit frictions