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Debt Overhang and Recapitalization in Closed and Open Economies

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  • Thomas Philippon

Abstract

This paper analyzes an economy in which debt overhang occurs simultaneously in the mortgage market and in the market for bank debt. Overhang in one market reinforces overhang in the other. In a closed economy, it is ex post Pareto-efficient to tax households and recapitalize the banks. In an open economy, however, some of the gains are transferred abroad, whereas all the costs are borne by domestic households. Efficient recapitalization programs therefore require global coordination.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 58 (2010)
Issue (Month): 1 (August)
Pages: 157-178

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Handle: RePEc:pal:imfecr:v:58:y:2010:i:1:p:157-178

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Cited by:
  1. Jimmy Melo, 2014. "Expectativas cambiarias, selección adversa y liquidez," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 27-62, May.
  2. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  3. Marius A. Zoican & Lucyna A. G�rnicka, 2013. "Banking Unions: Distorted Incentives and Efficient Bank Resolution," Tinbergen Institute Discussion Papers 13-184/VI, Tinbergen Institute, revised 16 May 2014.
  4. Elod Takáts & Christian Upper, 2013. "Credit and growth after financial crises," BIS Working Papers 416, Bank for International Settlements.
  5. Saki Bigio, 2012. "Financial Risk Capacity," 2012 Meeting Papers 97, Society for Economic Dynamics.
  6. Keiichiro Kobayashi & Tomoyuki Nakajima, 2014. "A macroeconomic model of liquidity crises," CIGS Working Paper Series 14-003E, The Canon Institute for Global Studies.
  7. Keiichiro Kobayashi & Tomoyuki Nakajima, 2014. "A macroeconomic model of liquidity crises," KIER Working Papers 876, Kyoto University, Institute of Economic Research.

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