Persistent Productivity Decline Due to Corporate Default
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.
|Date of creation:||Sep 2012|
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