We consider a DSGE model with flexible prices and sticky interest rates, allowing for endogenous firms’exit and entry decision together with a monopolistic competitive banking sector. The paper aims at investigating the relationship between firms dynamics and the dynamics of banking sector. We find the following results: i) in response to both real and financial shocks, economies characterized by endogenous firms dynamics present higher volatilities of both real and financial variables than those implied by a standard DSGE model with a fixed number of firms; ii) the extensive margin of the good market implies a slower recovery in the aftermath of a financial crisis; iii) the model with firms endogenous entry and endogenous exit shows countercyclical exit, in line with the empirical evidence; iv) economies featuring firms endogenous entry and exit decisions imply a quicker recovery than the economy with exogenous exit, when the macroprudential authority implements countercyclical capital requirements (Basel III). Overall, we show that theoretical models cannot disregard the role played by endogenous firms dynamics since they will underestimate the e¤ects of both real and financial shocks.

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