M Konrad Borowicz
of Financial Innovation and Regulation, Tilburg University
LAW AND MACRO FINANCE
A Theoretical Framework for Law and Macro Finance
Under review, The Review of Law and Development
This paper considers the effects of law within the paradigm of macro-finance. We argue that law affects liquidity and leverage primarily by regulating the strength of investor protection. The central claim of a theoretical framework for Law and Macro-Finance developed in this paper is that strong creditor rights, particularly the rights of money market creditors, exacerbate the procyclicality of liquidity and leverage and increase the volatility of the economic cycle. We also outline the directions of future empirical research needed to validate these claims. That research could be understood as an extension of the influential literature on Law and Finance.
Law and Liquidity
Work in progress
This paper examines in three theoretical steps the effects of law on liquidity. First, it identifies conceptually the legal determinants of liquidity, and specifically (i) securities and contracts laws’ impact on information costs and enforcement costs as a driver of market liquidity and (ii) bankruptcy and collateral laws’ role in creating the balance sheet space of dealers, as a driver of funding liquidity. Second, it argues that law’s effects on funding liquidity create distortions in the implementation of monetary, fiscal and prudential policy that remain unaccounted for in existing paradigms of liquidity regulation focused on banks. Third, it proposes an original framework for liquidity regulation aimed at addressing those distortions focused on countercyclical adaptations of bankruptcy and collateral law, particularly the bankruptcy safe harbors for repurchase agreement and the rules around collateral rehypothecation.
Law and Macro Finance of Corporate Debt
Revise and resubmit, Journal of Corporate Law Studies
This article considers theoretically the effects of the protection of corporate creditor rights through bankruptcy law on the corporate credit cycle. It argues that the effects of such protections on corporate credit are different in different parts of the economic cycle. During a period of economic growth, credit is readily available, so the effect of protection of creditor rights in that phase of the cycle could be to create or exacerbate a credit boom. In contrast, in a recession, the protection of creditor rights allows them to enforce their claims against distressed debtors, thereby potentially exacerbating a credit bust that usually characterizes a recession. This article further argues that a countercyclical design of creditor rights' strength can be relied on by macroeconomic policymakers to help smoothen the corporate leverage and business cycles.