Financial Distress, Bankruptcy Law and the Business Cycle
AbstractThis paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that â€˜softensâ€™ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust, or actively managing the interest rate across the cycle, could stabilize the economy in the long run. A comprehensive welfare analysis of the policy is provided as well.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2004fe07.
Date of creation: 2004
Date of revision:
Other versions of this item:
- Javier Suarez & Oren Sussman, 2007. "Financial distress, bankruptcy law and the business cycle," Annals of Finance, Springer, vol. 3(1), pages 5-35, January.
- Oren Sussman & Javier Suarez, 2004. "Financial Distress, Bankruptcy Law and the Business Cycle," Economics Series Working Papers 2004-FE-07, University of Oxford, Department of Economics.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-07 (All new papers)
- NEP-MAC-2004-03-07 (Macroeconomics)
- NEP-RMG-2004-03-07 (Risk Management)
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