Debt-Ridden Borrowers and Persistent Stagnation

Keiichiro Kobayashi and Daichi Shirai

No 23-001E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: Persistent stagnation often follows a financial crisis. We construct a model in which a debt buildup in the corporate sector can persistently depress the economy, even when there are no structural changes. We consider endogenous borrowing constraints on short-term and long-term debt. A firm is referred to as debt-ridden when its long-term debt is so large that it can never decrease even though the firm pays all income in each period to the lender. A debt-ridden firm continues inefficient production permanently, and the emergence of a substantial number of debt-ridden firms causes a persistent recession. Further, if the initial debt exceeds a certain threshold, the firm intentionally chooses to increase borrowing and, thus, becomes debt-ridden. We numerically show successive productivity shocks or a large wealth shock can generate debt-ridden firms. The relief of debt-ridden borrowers from excessive debt may be effective for economic recovery.

Pages: 54
Date: 2024-06
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cigs.canon/en/uploads/2024/09/dd5565b4a6e7 ... 77692acd69330c0e.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cnn:wpaper:23-001e

Access Statistics for this paper

More papers in CIGS Working Paper Series from The Canon Institute for Global Studies Contact information at EDIRC.
Bibliographic data for series maintained by The Canon Institute for Global Studies ().