Bank of Lithuania
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No 77
2020-06-18

Macroeconomic implications of insolvency regimes

  • Abstract

    The impact of creditor and debtor rights following firm insolvency are studied in a firm dynamics model where defaulting firms choose between restructuring or exit. The model accounts for differing effects of productivity shocks across economies that differ in the credit/debtor rights. Following a negative shock labour productivity falls sharply in a creditor-friendly regime such as the UK while in a debtor-friendly regime such as the US, there is a larger employment response. This paper suggests a possible explanation for the different employment and labour productivity response in the UK and US since the financial crisis.  

    JEL Codes: D21, E22, G33.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 73
2020-02-18

Banking regulation and collateral screening in a model of information asymmetry

  • Abstract

    This paper explores the impact of banking regulation on a competitive credit market with ex-ante asymmetric information and aggregate uncertainty. I construct a model where the government to impose a regulatory constraint that limits the losses banks make in the event of their default. I show that the addition of banking regulation results in three deviations from the standard theory. First, collateral is demanded of both high and low risk firms, even in the absence of asymmetric information. Second, if banking regulation is sufficiently strict, there may not exist an adverse selection problem. Third, a pooling Nash equilibrium can exist.

    JEL Codes: D86, G21, G28.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.