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The Collateral Channel under Imperfect Debt Enforcement

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Abstract

Does a country’s ability to enforce debt contracts affect the sensitivity of economic activity to collateral values? To answer this question, we introduce a novel industry-specific measure of real asset redeployability - the ease with which real assets are transfered to alternative uses - as a proxy for collateral liquidation values. Our measure exploits the heterogeneity of expenditures in new and used capital and the heterogeneity in the composition of real asset holdings across U.S. industries. Using a cross-industry cross-country approach, we find that industry size and growth are more sensitive to collateral values in countries with weaker debt enforcement. Our estimates indicate that the differential effect is sizeable. The sensitivity of economic activity to collateral values is not affected by a country’s financial development once the quality of debt enforcement is accounted for. We then rationalize our empirical findings based on a model of credit under imperfect enforcement and discuss an important implication of our empirical result: macroeconomic volatility generated by fluctuations in collateral values is higher in countries with weaker debt enforcement institutions.

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  • Toni Beutler & Mathieu Grobéty, 2011. "The Collateral Channel under Imperfect Debt Enforcement," Working Papers 11.11, Swiss National Bank, Study Center Gerzensee.
  • Handle: RePEc:szg:worpap:1111
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    1. Beutler, Toni & Grobéty, Mathieu, 2019. "The collateral channel under imperfect debt enforcement," European Economic Review, Elsevier, vol. 111(C), pages 336-359.
    2. Igan, Deniz & Mirzaei, Ali, 2020. "Does going tough on banks make the going get tough? Bank liquidity regulations, capital requirements, and sectoral activity," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 688-726.
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    5. Chala, Alemu Tulu & Forssbaeck, Jens, 2018. "Does Collateral Reduce Loan-Size Credit Rationing? Survey Evidence," Working Papers 2018:36, Lund University, Department of Economics.

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    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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