Financial Distress and Endogenous Uncertainty
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.
Year of publication: |
2014
|
---|---|
Authors: | Gourio, Francois |
Institutions: | Society for Economic Dynamics - SED |
Saved in:
freely available
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