Duration Of Bankruptcy Proceedings And Monetary Policy Effectiveness

Keywords

Bankruptcy proceedings; Court efficiency; Financial frictions; Monetary policy

Abstract

A common assumption in well-known costly-state-verification frameworks is that when a borrower defaults, creditors receive a payoff immediately (after incurring bankruptcy costs). While this assumption enhances tractability, it is unrealistic given the considerable delays in the actual practice of bankruptcy. In this paper, I identify the duration of bankruptcy proceedings as an additional source of friction in financial markets and investigate the relationship between this friction and the effectiveness of monetary policy by using U.S. state-level data. Consistent with the commonly-observed positive relationship between the degree of standard financial frictions and the amplitude of macroeconomic responses, I find that U.S. monetary policy is most effective in states with longer bankruptcy proceedings.

Publication Date

6-1-2015

Publication Title

Journal of Macroeconomics

Volume

44

Number of Pages

295-302

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.jmacro.2015.03.008

Socpus ID

84929147805 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84929147805

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