Financial Distress and Endogenous Uncertainty

Francois Gourio

No 1190, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: What is the macroeconomic effect of having a substantial number of firms close to default? This paper studies financial distress costs in a model where customers, suppliers and workers suffer losses if their employer goes bankrupt. I show that this mechanism generates amplification of fundamental shocks through procyclical TFP and countercyclical labor wedge. Because the strength of this amplification depends on the share of firms that are in financial distress, it operates mostly in recessions, when equity values are low. This leads macroeconomic volatility to be endogenously countercyclical. The cross-sectional distribution of firms' equity values affects directly aggregate macroeconomic volatility. Empirical evidence consistent with the model is provided.

Date: 2014
New Economics Papers: this item is included in nep-ban and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2014/paper_1190.pdf (application/pdf)

Related works:
Working Paper: Financial Distress and Endogenous Uncertainty (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:1190

Access Statistics for this paper

More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().