Bankruptcy Law and the Business Cycle
(Formerly: "A Stylized Model of
Financially-Driven Business Cycles")
Javier Suarez: CEMFI and CEPR
Oren Sussman: Saïd Business School,
University of Oxford
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 ‘softens’ 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.
codes: E32, E44, G33
Keywords: bankruptcy law, business cycles, financial distress.
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