Koen J. L. Schoors
Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics
Higher School of Economics; Centre for Economic Policy Research (CEPR)
International Finance, Forthcoming
Creditors are often passive because they are reluctant to show bad debts on their balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transitional and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomena in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.
Keywords: Creditor passivity, bankruptcy, arrears, bad loans, bank closure
JEL Classification: G21, G28, G33, P5Accepted Paper Series
Date posted: February 3, 2005
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