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We develop a model of liquidity crises based on debt overhang and credit networks. Firms need liquidity for its operation. Defaults of a group of firms may cause chain reaction of defaults of banks and firms through a credit network. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity.
From:
Keiichiro Kobayashi
Keio University
Tomoyuki Nakajima
University of Tokyo
We develop a model of liquidity crises based on debt overhang and credit networks. Firms need liquidity for its operation. Defaults of a group of firms may cause chain reaction of defaults of banks and firms through a credit network. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity.
From:
Keiichiro Kobayashi
Keio University
Tomoyuki Nakajima
University of Tokyo