Page 40 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.72, # 1, 2015, pp. 40-49

DEBT RIGIDITY CRISIS

Salman Ali Najafov

Scientific-Research Institute of Economic Studies, UNEC

e-mail: [email protected]

Mobile tel.: (+99450) 505294867

Received 10 February 2015; accepted 29 May 2015; published online 07 July 2015

Abstract

The paper demonstrates that debt crises are caused by debt rigidity. It is noted that

similarly to wage and price rigidity debt rigidity makes markets unable to adjust

quickly and adequately to the shocks in economy. It is justified that to make

companies and banks more flexible and resistant to shocks, companies‘ liabilities

similarly to income and assets price should be flexible. Paper argues that crisis in

Japan and banking fragility in US and euro area countries are caused by debt

rigidity, and these problems can be solved by liability flexibility which can be

provided by profit participating financing.

Keywords: debt crises, debt rigidity, profit/loss sharing financing, banks, liability

flexibility.

JEL classification: G01

Introduction

One of the main factors of effectiveness of firms and economy in whole is its

flexibility or ability to adjust quickly and adequately to the shocks in economy. In

particular the key factor of flexibility of firms is price and wage flexibility. The

40