The interrelations between financial distress, bankruptcy law and macroeconomic fluctuations are capturing growing interest among policy makers and academics alike. For example, [13] in his analysis of the Asian Crisis argues that policy makers failed to understand these interrelations, and as a result implemented policies that exacerbated the crisis. It is implied that macroeconomic effects should be taken into consideration when bankruptcy law is designed, and that bankruptcy and distress should be taken into consideration when macroeconomic policy is implemented.

Several authors have noticed the importance of the general equilibrium implications of financial distress in the context of the ongoing debate on bankruptcy law. This debate has centered on the social desirability of soft laws, such as US’ Chapter 11, that give borrowers an opportunity to reorganize, or hard laws, like the UK Bankruptcy Code, which is essentially a procedure for the enforcement of default-contingent liquidation rights. In particular, [12] argue that once we take into consideration the “general equilibrium aspects of asset-sales ... [particularly when] the shock that causes the seller’s distress is industry or economy-wide ... the policy of automatic auctions for the assets of distressed firms, without the possibility of Chapter 11 protection, is not theoretically sound.” This suggests that, once the macroeconomic effects are considered, the merits of a soft bankruptcy law would be evident.