Bank of Lithuania
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2020-06-18

Macroeconomic implications of insolvency regimes

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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.

Insolvency, Bankruptcy, Firm financing