Brown Bag Seminar - Yasin Kursat Önder (Ghent University)

Title:  Debt Moratorium: Theory and Evidence

Abstract:  We provide theoretical, quantitative, and empirical explanations on the effects of
debt moratorium policy, which stipulates the suspension of payments during
stress episodes. The theory predicts a rise in loan rates for non-stressed firms
while loan amounts depend on demand and supply elasticities. Conversely, for
stressed firms, the theory predicts a rise in loan amounts while loan rates depend
on elasticities. To empirically corroborate these findings and using administrative
Colombian data, we conduct a regression discontinuity design and compare
loans that barely met and missed the criteria of receiving the treatment and
investigate how real variables such as investment and labor are affected. We
finally shed quantitative insights on the effects of short and long-run gains and
losses of debt moratorium policies with a quantitative default model. We show
that indebtedness and default risk become amenable as the policy eliminates
liquidity concerns. Yet, if the policy can be designed to stipulate debt forgiveness
during such episodes, then larger welfare gains can be attained by reducing
default risk.