a1 University of Mississippi
a2 ISEE, Lindenwood University
This paper estimates the dynamics of the personal-bankruptcy rate over the business cycle by exploiting large cross-state variation. We find that bankruptcy rates are significantly above trend during a recession and rise as a recession persists. After a recession ends, there is a hangover in which bankruptcy rates begin to fall but remain above trend for several more quarters. Recovery periods see a strong bounce-back effect, with bankruptcy rates significantly below trend for several quarters. Despite the significant increases in bankruptcies during recessions, the largest contributor to rising bankruptcies during these periods has tended to be the longstanding upward trend.
We would like to thank an anonymous referee, Mike McCracken, Dan Thornton, and Yi Wen for their comments.