IDEAS home Printed from https://ideas.repec.org/a/eee/jmacro/v44y2015icp295-302.html
   My bibliography  Save this article

Duration of bankruptcy proceedings and monetary policy effectiveness

Author

Listed:
  • Aysun, Uluc

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.

Suggested Citation

  • Aysun, Uluc, 2015. "Duration of bankruptcy proceedings and monetary policy effectiveness," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 295-302.
    • Handle: RePEc:eee:jmacro:v:44:y:2015:i:c:p:295-302
    DOI: 10.1016/j.jmacro.2015.03.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0164070415000415
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmacro.2015.03.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chiara Forlati & Luisa Lambertini, 2011. "Risky Mortgages in a DSGE Model," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 285-335, March.
    2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    3. Lambert-Mogiliansky, Ariane & Sonin, Konstantin & Zhuravskaya, Ekaterina, 2007. "Are Russian commercial courts biased? Evidence from a bankruptcy law transplant," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 254-277, June.
    4. Martin Hellwig, 2009. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," De Economist, Springer, vol. 157(2), pages 129-207, June.
    5. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    6. Aysun Uluc, 2011. "An Alternative Method for Measuring Financial Frictions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-31, April.
    7. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, June.
    8. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
    9. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 883-913.
    10. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2002. "Courts: the Lex Mundi Project," NBER Working Papers 8890, National Bureau of Economic Research, Inc.
    11. Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 471-493, May.
    12. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.
    13. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
    14. Robert Kollmann, 2013. "Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 159-195, December.
    15. Aysun, Uluc & Brady, Ryan & Honig, Adam, 2013. "Financial frictions and the strength of monetary transmission," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1097-1119.
    16. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599, Elsevier.
    17. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    18. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    19. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    20. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
    21. Aysun, Uluc & Honig, Adam, 2011. "Bankruptcy costs, liability dollarization, and vulnerability to sudden stops," Journal of Development Economics, Elsevier, vol. 95(2), pages 201-211, July.
    22. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    23. Carlino Gerald & Defina Robert, 1995. "Regional Income Dynamics," Journal of Urban Economics, Elsevier, vol. 37(1), pages 88-106, January.
    24. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    25. Vasco Cúrdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
    26. J. Scott Davis, 2010. "The adverse feedback loop and the effects of risk in both the real and financial sectors," Globalization Institute Working Papers 66, Federal Reserve Bank of Dallas.
    27. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1077-1106, September.
    28. Romain Rancière & Aaron Tornell & Frank Westermann, 2008. "Systemic Crises and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 359-406.
    29. Lawrence H. Summers, 1986. "Why is the Unemployment Rate So Very High near Full Employment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 339-396.
    30. Simeon Djankov & Oliver Hart & Caralee McLiesh & Andrei Shleifer, 2008. "Debt Enforcement around the World," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1105-1149, December.
    31. Adrian, Tobias & Song Shin, Hyun, 2010. "Financial Intermediaries and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 12, pages 601-650, Elsevier.
    32. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
    33. René M. Stulz, 1999. "Golbalization, Corporate Finance, And The Cost Of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 8-25, September.
    34. Li, Kai, 1999. "Bayesian analysis of duration models: an application to Chapter 11 bankruptcy," Economics Letters, Elsevier, vol. 63(3), pages 305-312, June.
    35. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    36. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
    37. Jesus Orbe & Eva Ferreira & Vicente Nunez-Anton, 2002. "Length of time spent in Chapter 11 bankruptcy: a censored partial regression model," Applied Economics, Taylor & Francis Journals, vol. 34(15), pages 1949-1957.
    38. repec:bla:scandj:v:95:y:1993:i:1:p:43-64 is not listed on IDEAS
    39. Gerald Carlino & Robert Defina, 1998. "The Differential Regional Effects Of Monetary Policy," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 572-587, November.
    40. Jean Helwege, 1999. "How Long Do Junk Bonds Spend in Default?," Journal of Finance, American Finance Association, vol. 54(1), pages 341-357, February.
    41. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    42. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    43. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    44. Dahiya, Sandeep & John, Kose & Puri, Manju & Ramirez, Gabriel, 2003. "Debtor-in-possession financing and bankruptcy resolution: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 69(1), pages 259-280, July.
    45. Daniel M. Covitz & Song Han & Beth Anne Wilson, 2006. "Are longer bankruptcies really more costly?," Finance and Economics Discussion Series 2006-27, Board of Governors of the Federal Reserve System (U.S.).
    46. Lars Lefgren & Frank McIntyre, 2009. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates," Journal of Law and Economics, University of Chicago Press, vol. 52(2), pages 367-393, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Biswajit Banerjee & Risto Herrala, 2024. "Testing the impact of liquidation speed on leverage using Indian data," Working Papers 113, Ashoka University, Department of Economics.
    2. Banerjee, Biswajit & Herrala, Risto, 2024. "Testing the impact of liquidation speed on leverage using Indian data," BOFIT Discussion Papers 6/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    3. Jairaj Gupta & Mariachiara Barzotto & André Aroldo Freitas De Moura, 2024. "Bankruptcy Resolution: Misery or Strategy," Abacus, Accounting Foundation, University of Sydney, vol. 60(3), pages 665-708, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Uluc Aysun, 2011. "The implications of dynamic financial frictions for DSGE models," Working papers 2011-07, University of Connecticut, Department of Economics.
    2. Aysun, Uluc, 2014. "Bankruptcy resolution capacity and economic fluctuations," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 387-399.
    3. Uluc Aysun & Raman Khaddaria, 2012. "Bankruptcy resolution capacity and regional economic fluctuations," Working Papers 2012-01, University of Central Florida, Department of Economics.
    4. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, October –.
    5. Aysun Uluc, 2011. "An Alternative Method for Measuring Financial Frictions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-31, April.
    6. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    7. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
    8. Uluc Aysun & Ryan Brady & Adam Honig, 2009. "Financial Frictions and Monetary Transmission Strength: A Cross-Country Analysis," Working papers 2009-24, University of Connecticut, Department of Economics, revised Jun 2010.
    9. Silvestrini, Andrea & Zaghini, Andrea, 2015. "Financial shocks and the real economy in a nonlinear world: From theory to estimation," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 915-929.
    10. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2018. "Optimal Dynamic Capital Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1271-1297, September.
    11. Andrea Silvestrini & Andrea Zaghini, 2015. "Financial shocks and the real economy in a nonlinear world: a survey of the theoretical and empirical literature," Questioni di Economia e Finanza (Occasional Papers) 255, Bank of Italy, Economic Research and International Relations Area.
    12. Andrea Ajello & Nina Boyarchenko & François Gourio & Andrea Tambalotti, 2022. "Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms," Staff Reports 1002, Federal Reserve Bank of New York.
    13. Ekaterina Pirozhkova, 2017. "Financial frictions and robust monetary policy in the models of New Keynesian framework," BCAM Working Papers 1701, Birkbeck Centre for Applied Macroeconomics.
    14. J. Scott Davis, 2010. "The adverse feedback loop and the effects of risk in both the real and financial sectors," Globalization Institute Working Papers 66, Federal Reserve Bank of Dallas.
    15. Alpanda, Sami & Aysun, Uluc, 2014. "International transmission of financial shocks in an estimated DSGE model," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 21-55.
    16. Vadim Elenev & Tim Landvoigt & Stijn Van Nieuwerburgh, 2021. "A Macroeconomic Model With Financially Constrained Producers and Intermediaries," Econometrica, Econometric Society, vol. 89(3), pages 1361-1418, May.
    17. Marzie Taheri Sanjani, 2014. "Financial Frictions and Sources of Business Cycle," IMF Working Papers 2014/194, International Monetary Fund.
    18. Ioanna Kokores, 2015. "Lean-Against-the-Wind Monetary Policy: The Post-Crisis Shift in the Literature," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 66-99, july-Dece.
    19. Hristov, Atanas, 2015. "The high sensitivity of employment to agency costs: The relevance of wage rigidity," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 137-154.
    20. Michał Brzoza‐Brzezina & Marcin Kolasa, 2013. "Bayesian Evaluation of DSGE Models with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1451-1476, December.

    More about this item

    Keywords

    Bankruptcy proceedings; Financial frictions; Court efficiency; Monetary policy;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:44:y:2015:i:c:p:295-302. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622617 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.