Debt Overhang and Recapitalization in Closed and Open Economies

Thomas Philippon ()

IMF Economic Review, 2010, vol. 58, issue 1, 157-178

Abstract: This paper analyzes an economy in which debt overhang occurs simultaneously in the mortgage market and in the market for bank debt. Overhang in one market reinforces overhang in the other. In a closed economy, it is ex post Pareto-efficient to tax households and recapitalize the banks. In an open economy, however, some of the gains are transferred abroad, whereas all the costs are borne by domestic households. Efficient recapitalization programs therefore require global coordination.

Date: 2010
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