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Financial Distress, Bankruptcy Law and the Business Cycle

Oren Sussman and Javier Suarez

OFRC Working Papers Series from Oxford Financial Research Centre

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.

New Economics Papers: this item is included in nep-mac and nep-rmg
Date: 2004
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