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Persistent Productivity Decline Due to Corporate Default

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  • KOBAYASHI Keiichiro
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    Abstract

    Low economic growth tends to be seen a decade after financial crises. To explain this fact, we construct general equilibrium models based on a simplified version of Jermann and Quadrini (2012), in which exogenous shocks cause a substantial number of firms to default on their debts. Lenders cannot pre-commit to debt forgiveness, forcing them to allow "debt-ridden" firms, which are defined as firms whose lenders have a unilateral right to liquidate them, to continue. Although debt-ridden firms are under the control of their lenders, their borrowing constraints are tighter than those of normal firms. This implies that the emergence of debt-ridden borrowers may be a cause of the "financial shocks" seen in the recent macroeconomic literature. Tightened borrowing constraints due to the emergence of debt-ridden firms lower aggregate productivity and may worsen the labor wedge.

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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 12052.

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    Length: 18 pages
    Date of creation: Sep 2012
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    Handle: RePEc:eti:dpaper:12052

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    1. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
    2. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
    3. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
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