The macroeconomic effects of default and debt restructuring: An agent based exploration

Abstract

In this paper we investigate the economic impact of bank reactions to firm financial delinquency. In case of firm liquidity shortage, indeed, the bank commonly proposes two different solutions of debt restructuring to help large firms to recover from their financial distress situation. One option is the debt rescheduling: the bank agrees to an extension of the debt maturity, i.e., to be repaid in the following time periods. The other one is the debt relief: the bank agrees to renegotiate the terms of the debt contract, i.e, to apply a discount rate on the firm past and present debt. We find that higher bank tolerance and debt discount correspond to higher average GDP level, growth rate and volatility. Moreover, the number of recessions decreases while their duration increases. Finally, we perform a monetary policy exercise, finding that an expansionary policy coupled with higher bank tolerance would be very beneficial to the economy.