IDEAS home Printed from
   My bibliography  Save this paper

Aggregate Shock, Capital Market Opening, and Optimal Bailout


  • Se-Jik Kim

    (KIEP - Korea Institute for International Economic Policy)

  • Ivailo Izvorski


This paper explores the joint effect of aggregate productivity shocks and capital market liberalization on the optimal bailout (or liquidation) policy of banks towards defaulted borrowers. It suggests that in bad times both good and bad firms default on their obligations, it is harder for the bank to distinguish between the two and therefore it is less costly to bail out defaulted firms. Therefore, the optimal liquidation rate in a closed economy may be substantially lower in recessions than in booms. In an economy with open capital markets, however, the corporate rate of return has to be raised at least up to the world rate of interest by improving the composition of the corporate sector through higher liquidation in order to prevent an outflow of capital and the subsequent financial crisis. As a result, the optimal liquidation rate (bailout rate) during recessions may be much higher (lower) in an economy with liberalized capital markets than in a closed economy. The model in this paper explains why liquidation rates of defaulted firms have risen significantly and structural reform to facilitate more liquidation has been purchased after the financial crisis in those East Asian countries with more liberalized capital markets.

Suggested Citation

  • Se-Jik Kim & Ivailo Izvorski, 2001. "Aggregate Shock, Capital Market Opening, and Optimal Bailout," Finance Working Papers 21764, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:21764

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    capital market opening; optimal bailout; aggregate productivity shocks;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eab:financ:21764. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shiro Armstrong). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.