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Bankruptcy law as an alternative to fiscal policy in a Woodford model with a productivity shock

Published online by Cambridge University Press:  02 April 2024

Aloísio Araújo  and
Vitor Costa
Aloísio Araújo
Affiliation:
FGV EPGE, Rio de Janeiro, RJ, Brazil IMPA, Rio de Janeiro, RJ, Brazil
Vitor Costa*
Affiliation:
IMPA, Rio de Janeiro, RJ, Brazil
*
Corresponding author: Vitor C. Costa; Email: vitor.chagas@impa.br
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Abstract

We show that trade credit contracts between sectors can provide a useful alternative to fiscal transfers during a major productivity shock. Defaults in credit contracts function as transfers between sectors, which can be implemented through a bankruptcy law or through credit renegotiation. Transfers implemented through defaults allow for a reduction in the size of the fiscal policy that restores the economy to the optimal allocation, constituting a relevant alternative to economies without an available fiscal space to implement the optimal policy.

Keywords

Fiscal policyNetwork structureBankruptcy law
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 22
Copyright
© The Author(s), 2024. Published by Cambridge University Press

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