The Cost of Recession Revisited: A Reverse-Liquidationist View

38 Pages Posted: 23 Jan 2000

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mohamad L. Hammour

Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Date Written: October 1999

Abstract

The observation that the 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 liquidations are privately inefficient and essentially wasteful. This paper proposes an alternative perspective. Based on a combination of theory with empirical evidence on gross job flows and on financial and labor market rents, we find that, cumulatively, recessions result in reduced restructuring, and that this is likely to be socially costly once we consider inefficiencies on both the creation and destruction margins.

KEY WORDS: Business Cycle, Unemployment, Inefficient Separations, Job Creation and Destruction, Financial Constraints, Depressed Restructuring, Heterogeneity, Liquidation, Sclerosis

JEL Classification: E24, E32, E44, G3

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., The Cost of Recession Revisited: A Reverse-Liquidationist View (October 1999). MIT Department of Economics Working Paper No. 99-22. Available at SSRN: https://ssrn.com/abstract=195738 or http://dx.doi.org/10.2139/ssrn.195738

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Building E52-528
Cambridge, MA 02142
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617-253-0489 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Mohamad L. Hammour

Ecole Normale Superieure (ENS) ( email )

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Ecole Normale Superieure
75014 Paris
France
+33 143 136 305 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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