Endogenous Firms' Exit, Inefficient Banks and Business Cycle Dynamics

I consider a NK-DSGE model with endogenous firms' exit and entry together with a monopolistic competitive banking sector, where defaulting firms do not repay loans to banks. I show that the exit margin is an important shock transmission channel. It implies: i) an endogenous countercyclical number of firms destruction; ii) an endogenous countercyclical bank markup and spread. The interaction between i) and ii) generates a stronger propagation mechanism with respect to a model with efficient banks. Compared to a model with exogenous exit the model generates a correlation between output and firms' entry closer to data.