37 Pages Posted: 13 Apr 2005
Date Written: December 2004
Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights into the phenomenon of creditor passivity, both in transition 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, bad loans, bank closure, arrears
JEL Classification: G21, G28, G33, P50
Suggested Citation: Suggested Citation
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