Working Paper: CEPR ID: DP15518
Authors: Oscar Jorda; Martin Kornejew; Moritz Schularick; Alan M. Taylor
Abstract: With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.
Keywords: Corporate Debt; Business Cycles; Local Projections
JEL Codes: E44; G32; G33; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate debt booms (F65) | investment declines (E20) |
| Corporate debt booms (F65) | output declines (E31) |
| Corporate debt booms (F65) | prolonged recovery periods (C41) |
| High restructuring costs (G32) | outcomes similar to household debt crises (F65) |
| Inefficient debt restructuring (G33) | economic costs of corporate debt booms (G32) |
| Institutional efficiency in debt resolution (G33) | adverse effects of corporate debt (G33) |