Bankruptcy Costs, Liability Dollarization, and Vulnerability.pdfVIP

University of Connecticut DigitalCommons@UConn Economics Working P pers Dep rtment of Economics 10-1-2008 Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops Uluc Aysun University of Co nnecticut Ad am Honig Am herst College Follow this nd dditional works t : /econ_wp pers Recommended Cit tion Aysun, Uluc nd Honig, Ad m, B nkruptcy Costs, Li bility Doll riz tion, nd Vulner bility to Sudden Stops (2008). Economics Working Pap ers. P per 200841. /econ_wp pers/200841 This is brought to you for free nd open ccess by the Dep rtment of Economics t DigitalCommons@UConn. It has been ccepted for inclusion in Economics Working P pers by n uthorized dministr tor of DigitalCommons@UConn. For more inform tion, please cont ct digitalcommons@. Department of Economics Working Paper Series Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops Uluc Aysun University of Connecticut Adam Honig Amherst College Working Paper 2008-41 October 2008 341 Mansfield Road, Unit 1063 Storrs, CT 06269–1063 Phone: (860) 486–3022 Fax: (860) 486–4463 / This working paper is indexed on RePEc, / Abstract Emerging market countries that have improved institutions and attained inter- mediate levels of institutional quality have experienced severe financial crises fol- lowing capital flow reversals. However, there is also evidence that countries with strong institutions and deep capital markets are less affected by external shocks. We reconcile these two observations using a calibrated DSGE model that extends the financial accelerator framework developed in Bernanke, Gertler, and Gilchrist (1999). The model captures financial market institutional quality with creditors. ability to recover assets from bankrupt firms. Bankruptcy costs affect vulnerabil- ity to sudden stops directly but also indirect