Bankruptcy law as an alternative to fiscal policy in a Woodford model with a productivity shock

Aloísio Araújo and Vitor Costa

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: We show that trade credit contracts between sectors can provide a useful alternative to fiscal transfers during a major productivity shock. Defaults in credit contracts function as transfers between sectors, which can be implemented through a bankruptcy law or through credit renegotiation. Transfers implemented through defaults allow for a reduction in the size of the fiscal policy that restores the economy to the optimal allocation, constituting a relevant alternative to economies without an available fiscal space to implement the optimal policy.

Date: 2025
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