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Duration of bankruptcy proceedings and monetary policy effectiveness

Uluc Aysun ()

Journal of Macroeconomics, 2015, vol. 44, issue C, 295-302

Abstract: A common assumption in well-known costly-state-verification frameworks is that when a borrower defaults, creditors receive a payoff immediately (after incurring bankruptcy costs). While this assumption enhances tractability, it is unrealistic given the considerable delays in the actual practice of bankruptcy. In this paper, I identify the duration of bankruptcy proceedings as an additional source of friction in financial markets and investigate the relationship between this friction and the effectiveness of monetary policy by using U.S. state-level data. Consistent with the commonly-observed positive relationship between the degree of standard financial frictions and the amplitude of macroeconomic responses, I find that U.S. monetary policy is most effective in states with longer bankruptcy proceedings.

Keywords: Bankruptcy proceedings; Financial frictions; Court efficiency; Monetary policy (search for similar items in EconPapers)
JEL-codes: C63 E02 E44 E52 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.jmacro.2015.03.008

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