 Bankruptcy resolution capacity and economic fluctuationsJournal of Macroeconomics, 2014, vol. 40, issue C, 387-399 Abstract: In this paper, I build a partial equilibrium model and uncover a relationship between regional macroeconomic fluctuations and bankruptcy resolution capacity that depends on the cyclicality of bankruptcy. If the frequency of bankruptcy is countercyclical, the model predicts that fluctuations are more severe in regions with lower bankruptcy resolution capacity. This is because, in these regions, banks’ bad-loan recovery costs are higher (due to the length of the bankruptcy proceedings) and their lending is more sensitive to macroeconomic shocks that impact the likelihood of bankruptcy. Therefore, shocks that increase the frequency of bankruptcy and decrease output at the same time, for example, are amplified due to a lower level of bank lending. I draw opposite conclusions when bankruptcy is procyclical (i.e., economic fluctuations are less severe in regions with low bankruptcy resolution capacity). In the second half of the paper, I find evidence indicating that bankruptcy is countercyclical and that in the U.S. states with lower bankruptcy resolution capacity, economic fluctuations, consistent with the model’s predictions, are more severe. Keywords: Bankruptcy resolution capacity; Regional economic fluctuations; U.S. states (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:40:y:2014:i:c:p:387-399 DOI: 10.1016/j.jmacro.2014.02.001 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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