Bankruptcy resolution capacity and economic fluctuations

    Authors

    U. Aysun

    Comments

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    Abbreviated Journal Title

    J. Macroecon.

    Keywords

    Bankruptcy resolution capacity; Regional economic fluctuations; US; states; BUSINESS FLUCTUATIONS; FINANCIAL CRISES; MONETARY-POLICY; UNITED-STATES; AGENCY COSTS; NET WORTH; MARKETS; GROWTH; BANKING; MODELS; Economics

    Abstract

    In this paper, I build a partial equilibrium model and uncover a relationship between regional macroeconomic fluctuations and bankruptcy resolution capacity that depends on the cyclicality of bankruptcy. If the frequency of bankruptcy is countercyclical, the model predicts that fluctuations are more severe in regions with lower bankruptcy resolution capacity. This is because, in these regions, banks' bad-loan recovery costs are higher (due to the length of the bankruptcy proceedings) and their lending is more sensitive to macroeconomic shocks that impact the likelihood of bankruptcy. Therefore, shocks that increase the frequency of bankruptcy and decrease output at the same time, for example, are amplified due to a lower level of bank lending. I draw opposite conclusions when bankruptcy is procyclical (i.e., economic fluctuations are less severe in regions with low bankruptcy resolution capacity). In the second half of the paper, I find evidence indicating that bankruptcy is countercyclical and that in the U.S. states with lower bankruptcy resolution capacity, economic fluctuations, consistent with the model's predictions, are more severe. (C) 2014 Elsevier Inc. All rights reserved.

    Journal Title

    Journal of Macroeconomics

    Volume

    40

    Publication Date

    1-1-2014

    Document Type

    Article

    Language

    English

    First Page

    387

    Last Page

    399

    WOS Identifier

    WOS:000336870200027

    ISSN

    0164-0704

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