Aggregate Restructuring and the Credit Market
21 Pages Posted: 18 Feb 2007
Date Written: February 2007
We investigate the role of the credit market in an economy where firms can implement a mature technology or restructure their activity and adopt a new technology. We show that firms' collateral and credit relationships ease firms' access to credit and investment but can also inhibit firms' restructuring. When this occurs, a negative collateral shock squeezes collateral-poor firms out of the credit market but fosters the restructuring of collateral-rich firms, possibly through the breakdown of their credit relationships. We characterize conditions under which, through their effect on the price of collateral assets, the credit rationing of collateral-poor firms and the restructuring of collateral-rich firms reinforce or conflict with each other.
Keywords: Aggregate Restructuring, Collateral, Credit Relationships
JEL Classification: E44
Suggested Citation: Suggested Citation