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Financial Distress and the Business Cycle

Suarez, Javier and Sussman, Oren (1999) Financial Distress and the Business Cycle. Oxford Review of Economic Policy, 15 (3). pp. 39-51.


In this paper we argue that firms' financial distress should play a greater role in the macroeconomic analysis of the business cycle. We provide a non-technical account of a general equilibrium model that exhibits financially-driven equilibrium cycles. We show that the empirical evidence is widely supportive of the key hypothesis and implications of our approach. We use the model in order to evaluate the effects of several policy measures. It turns out that deepening the market for second-hand capital goods, subsidizing the interest payments of companies which start up when financial conditions are tight, and bailing out some companies in default can indeed 'stabilize' the economy. By way of generalization, we may say that the policy reaction to a financially driven bust should be accommodating.

Item Type: Article
Keywords: Bankruptcy law; Business cycles; Financial distress; Liquidation; finance
Subject(s): Finance
Date Deposited: 21 Feb 2012 20:24
Last Modified: 02 Mar 2017 14:39
Funders: N/A

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