Journal Article

The Cost of Recessions Revisited: A Reverse-Liquidationist View

Ricardo J. Caballero and Mohamad L. Hammour

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 2, pages 313-341
Published in print April 2005 | ISSN: 0034-6527
Published online April 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2005.00334.x
The Cost of Recessions Revisited: A Reverse-Liquidationist View

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  • Prices, Business Fluctuations, and Cycles
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The observation that liquidations are concentrated in recessions has long been the subject of controversy. One view holds that liquidations are beneficial in that they result in increased restructuring. Another view holds that this rise in restructuring is costly since liquidations are privately inefficient and essentially wasteful. This paper proposes an alternative perspective. On the basis of a combination of theory with empirical evidence on gross job flows and on financial and labour market rents, we find that, cumulatively, recessions result in reduced rather than increased restructuring, and that this is likely to be socially costly once we consider inefficiencies on both the creation and destruction margins.

Keywords: E32; G33

Journal Article.  13350 words.  Illustrated.

Subjects: Prices, Business Fluctuations, and Cycles ; Bankruptcy

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