Working Paper: NBER ID: w7446
Authors: Pierrerichard Agnor; Joshua Aizenman
Abstract: This paper analyzes the implication of inefficient financial intermediation for crisis management in a country where firms are highly-indebted. The analysis is based on a model in which firms rely on bank credit to finance their working capital needs and lenders face high state verification and enforcement costs of loan contracts. The analysis shows that higher contract enforcement and verification costs, lower expected productivity, or higher volatility, may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable employment and output losses. The main implication of this analysis for the current policy debate on crisis management is East Asia is that dept reduction, in addition to debt rescheduling, may be required as part of the process of reducing financial sector inefficiencies.
Keywords: financial intermediation; crisis management; debt reduction
JEL Codes: E44; F36; I31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher contract enforcement and verification costs (D86) | lower expected productivity (O49) |
| higher contract enforcement and verification costs (D86) | higher volatility (G17) |
| lower expected productivity (O49) | higher volatility (G17) |
| higher volatility (G17) | potential shift to the wrong side of the debt Laffer curve (E62) |
| higher contract enforcement and verification costs (D86) | potential shift to the wrong side of the debt Laffer curve (E62) |