WP Global Economy 2017.10.26
We develop a model of liquidity crises based on debt overhang and credit networks. Firms need liquidity for its operation. Defaults of a group of fi rms may cause chain reaction of defaults of banks and firms through a credit network. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity.