FIRM ENTRY AND LIQUIDITY

Lenno Uusküla

Firm entry has been analyzed extensively together with business cycles in the last years. Firm entry in relation to liquidity is a new topic. From theory, it is not evident that number of new firms should depend on the availability and price of liquidity, however, there is some evidence that it actually is. The objective of his paper is to analyze behaviour of firm entry and economic activity to liquidity shocks using Estonian data for the period 1995M1-2006M7. Different VAR and VECM models are used to indentify impulse responses. There is evidence that less firms entrer after a contractionary liquidity shock. There is also evidence that firm entry reacts quicker to liquidity than economic activity indicator. Implications of the results are discussed.