HOME » wiiw Seminar in International Economics » Financial Crisis, Capital Liquidation and the ...
Alex Mourmouras, IMF
(with Steven H. Russell)
Seminar organized in cooperation with the Joint Vienna Institute
We study a simple neoclassical model of investment in a developing country, modified to allow for long-term projects and short-term debt. Early signals indicating low productivity of investment may lead creditors to call loans in early. In such a crisis, firms protected by limited liability default and liquidate capital, even though they do so at a loss (a "fire sale"). We show that short-term debt financing is beneficial in good (normal) times: when there is no adverse signal, and thus no need to liquidate capital, investment, the capital-labor ratio, wages and ex post worker utility are all higher than they would be if liquidation were not possible or was prohibited. Capital liquidation exacerbates the effects of negative shocks by lowering the capital-labor ratio and lowering wages in bad times (crises). Capital liquidation raises the variability of wages and hurts workers who cannot insure against wage income (this seems plausible in emerging market economies). Accumulating a stock of international reserves to be used during or after a crisis can mitigate the adverse effects of capital liquidation on wage variability and worker welfare.
Download: Presentation | Paper
wiiw Seminar in International Economics
 |
Financial Crisis, Capital Liquidation and the Demand for International Reserves (by Alex Mourmouras and Steven H. Russell) wiiw Seminar in International Economics 29 October 2009, 4 p.m., Venue: wiiw, 1060 Vienna, Rahlgasse 3 FREE DOWNLOAD Topics: Macroeconomic Analysis and Policy |
Alex Mourmouras, IMF
(with Steven H. Russell)
Seminar organized in cooperation with the Joint Vienna Institute
We study a simple neoclassical model of investment in a developing country, modified to allow for long-term projects and short-term debt. Early signals indicating low productivity of investment may lead creditors to call loans in early. In such a crisis, firms protected by limited liability default and liquidate capital, even though they do so at a loss (a "fire sale"). We show that short-term debt financing is beneficial in good (normal) times: when there is no adverse signal, and thus no need to liquidate capital, investment, the capital-labor ratio, wages and ex post worker utility are all higher than they would be if liquidation were not possible or was prohibited. Capital liquidation exacerbates the effects of negative shocks by lowering the capital-labor ratio and lowering wages in bad times (crises). Capital liquidation raises the variability of wages and hurts workers who cannot insure against wage income (this seems plausible in emerging market economies). Accumulating a stock of international reserves to be used during or after a crisis can mitigate the adverse effects of capital liquidation on wage variability and worker welfare.
Download: Presentation | Paper
Visitors who downloaded this publication/presentation also downloaded:
|
Reforming innovation systems in BY, KAZ and UA: Lost in Transition/Translation?” (by Hannes Leo) wiiw Seminar, 15 October 2012, 5 p.m., Venue: wiiw, Rahlgasse 3, 1060 Vienna DETAILS |
|
What went wrong in Slovenia and how to get out of the mess? (by Joze P. Damijan) wiiw Seminar Series 'EU in Crisis' 08 October 2012, 5 p.m., Venue: wiiw, 1060 Vienna, Rahlgasse 3 DETAILS |
|
The European Rim Countries - Challenges and Opportunities for EU Competitiveness (by Vasily Astrov, Peter Havlik, Mario Holzner, Gabor Hunya, Isilda Mara, Sandor Richter, Roman Stöllinger and Hermine Vidovic) wiiw Policy Note and Report No. 9, October 2012 49 pages including 3 Tables and 12 Figures DETAILS |
