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Financial Distress and the Business Cycle

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  • Suarez, Javier
  • Sussman, Oren

Abstract

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 nontechnical 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. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Suarez, Javier & Sussman, Oren, 1999. "Financial Distress and the Business Cycle," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(3), pages 39-51, Autumn.
    • Handle: RePEc:oup:oxford:v:15:y:1999:i:3:p:39-51
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    Cited by:

    1. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2001. "Credit growth, problem loans and credit risk provisioning in Spain," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 331-353, Bank for International Settlements.
    2. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    3. Franz R. Hahn, 2001. "Macroprudential Financial Regulation and Monetary Policy," WIFO Working Papers 154, WIFO.
    4. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123, Central Bank of Chile.
    5. Eric Tymoigne, 2010. "Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility," Economics Working Paper Archive wp_605, Levy Economics Institute.
    6. Mitja Steinbacher & Timotej Jagrič, 2020. "Interbank rules during economic declines: Can banks safeguard capital base?," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(2), pages 471-499, April.

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