DP2331 The Cost of Recessions Revisited: A Reverse-Liquidationist View

Author(s): Ricardo Caballero, Mohamad Hammour
Publication Date: December 1999
Keyword(s): Creative Destruction, Financial constraints, job flows, Liquidations, Recessions, Rents, Restructuring, Unemployment
JEL(s): E20, E30, G30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2331

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.