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The Cost of Recessions Revisited: A Reverse-Liquidationist View

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Caballero, Ricardo
Hammour, Mohamad

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Abstract

The observation that liquidations are concentrated in recessions has long been the subject of controversy. One view holds that liquidations are beneficial in that they result in increased restructuring. Another view holds that liquidations are privately inefficient and essentially wasteful. This paper proposes an alternative perspective. Based on a combination of theory with empirical evidence on gross job flows and on financial and labour market rents, we find that, cumulatively, recessions result in reduced restructuring, and that this is likely to be socially costly once we consider inefficiencies on both the creation and destruction margins.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2331.

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Date of creation: Dec 1999
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Handle: RePEc:cpr:ceprdp:2331

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Related research
Keywords: Creative Destruction; Financial constraints; job flows; Liquidations; Recessions; Rents; Restructuring; Unemployment;

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Find related papers by JEL classification:
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
G30 - Financial Economics - - Corporate Finance and Governance - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  5. Ricardo J. Caballero & Mohamad L. Hammour, 1998. "Improper Churn: Social Costs and Macroeconomic Consequences," NBER Working Papers 6717, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Ramey, Garey & Watson, Joel, 1997. "Contractual Fragility, Job Destruction, and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 873-911, August.
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  17. Merz, Monika, 1999. "Heterogeneous job-matches and the cyclical behavior of labor turnover," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 91-124, February. [Downloadable!] (restricted)
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  21. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September. [Downloadable!] (restricted)
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  22. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc. [Downloadable!]
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  26. Caballero, Ricardo J & Hammour, Mohamad L, 1994. "The Cleansing Effect of Recessions," American Economic Review, American Economic Association, vol. 84(5), pages 1350-68, December. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Raven E. Saks & Abigail Wozniak, 2007. "Labor Reallocation over the Business Cycle: New Evidence from Internal Migration," IZA Discussion Papers 2766, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Ansgar Belke & Rainer Fehn & Neil Foster, 2001. "Venture Capital Investment and Labor Market Performance: A Panel Data Analysis," Vienna Economics Papers 0112, University of Vienna, Department of Economics. [Downloadable!]
    Other versions:
  3. Ansgar Belke & Rainer Fehn, 2001. "Institutions and Structural Unemployment: Do Capital-Market Imperfections Matter?," Vienna Economics Papers 0106, University of Vienna, Department of Economics. [Downloadable!]
    Other versions:
  4. Valerie Cerra & Sweta C. Saxena, 2005. "Growth Dynamics: The Myth of Economic Recovery," Macroeconomics 0508008, EconWPA. [Downloadable!]
    Other versions:
  5. Ansgar Belke & Rainer Fehn & Neil Foster, 2003. "Does Venture Capital Investment Spur Employment Growth?," Vienna Economics Papers 0303, University of Vienna, Department of Economics. [Downloadable!]
    Other versions:
  6. Min Ouyang, 2005. "The Scarring Effect of Recessions," Working Papers 050609, University of California-Irvine, Department of Economics. [Downloadable!]
    Other versions:
  7. Helge Braun & Reinout De Bock & Riccardo DiCecio, 2006. "Aggregate shocks and labor market fluctuations," Working Papers 2006-004, Federal Reserve Bank of St. Louis. [Downloadable!]
  8. Ricardo Caballero G, 2002. "Coping With Chile’s External Vulnerability: A Financial Problem," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(1), pages 11-36, April. [Downloadable!]
    Other versions:
  9. Olivier Blanchard, 2000. "What do we know about Macroeconomics that Fisher and Wicksell did not?," NBER Working Papers 7550, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Gadi Barlevy, 2004. "On the Timing of Innovation in Stochastic Schumpeterian Growth Models," NBER Working Papers 10741, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, exit and plant-level dynamics over the business cycle," Working Paper 0718, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  12. Chen, Kaiji & Song, Zheng, 2009. "Financial Frictions on Capital Allocation: A Transmission Mechanism of TFP Fluctuations," MPRA Paper 15211, University Library of Munich, Germany. [Downloadable!]
  13. Ricardo J. Caballero & Mohamad L. Hammour, 2000. "Creative Destruction and Development: Institutions, Crises, and Restructuring," NBER Working Papers 7849, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Márcio Corrêa & Mário Centeno, 2006. "Technological Progress And Average Job Matching Quality," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 166, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  15. Calcagnini, Giorgio & Saltari, Enrico, 2003. "Labour and Financial Market Determinants of Investment Decisions in Europe," EIFC - Technology and Finance Working Papers 26, United Nations University, Institute for New Technologies. [Downloadable!]
  16. Chen, Kaiji & Song, Zheng, 2007. "Financial Friction, Capital Reallocation and Expectation-Driven Business Cycles," MPRA Paper 3889, University Library of Munich, Germany. [Downloadable!]
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