Financial Distress, Bankruptcy Law and the Business Cycle

Oren Sussman and Javier Suarez

No 2004-FE-07, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that ‘softens’ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust, or actively managing the interest rate across the cycle, could stabilize the economy in the long run. A comprehensive welfare analysis of the policy is provided as well.

Keywords: bankruptcy law; business cycles; financial distress (search for similar items in EconPapers)
JEL-codes: E32 E44 G33 (search for similar items in EconPapers)
Date: 2004-01-01
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Related works:
Journal Article: Financial distress, bankruptcy law and the business cycle (2007)
Working Paper: Financial Distress, Bankruptcy Law and the Business Cycle (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:2004-fe-07

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