Discussion Paper Details

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Title: The Cost of Recessions Revisited: A Reverse-Liquidationist View

Author(s): Ricardo Caballero and Mohamad Hammour

Publication Date: December 1999

Keyword(s): Creative Destruction, Financial constraints, job flows, Liquidations, Recessions, Rents, Restructuring and Unemployment

Programme Area(s): International Macroeconomics

Abstract: The observation that 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 labour 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.

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Bibliographic Reference

Caballero, R and Hammour, M. 1999. 'The Cost of Recessions Revisited: A Reverse-Liquidationist View'. London, Centre for Economic Policy Research.