Costly Default and Skewed Business Cycle

Résumé

We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and a financial friction generating social costs of default. We provide a closed-form solution for the general equilibrium of the economy under specific assumptions, allowing for analytic results and straightforward simulations. Endogenous default generates asymmetric business cycles and our model replicates both the negative skew of GDP and the positive skew of credit spreads found in US data. Stronger financial frictions cause a rise in asymmetry and amplify the welfare costs of default. A Pigouvian tax on financial intermediation mitigates most of these negative effects at the cost of a steady-state distortion.

Mots-clés

Codes JEL

Remplace

Patrick Fève, Pablo Garcia Sanchez, Alban Moura et Olivier Pierrard, « Costly default and asymetric real business cycles », TSE Working Paper, n° 19-1048, novembre 2019.

Référence

Patrick Fève, Pablo Garcia Sanchez, Alban Moura et Olivier Pierrard, « Costly Default and Skewed Business Cycle », European Economic Review, vol. 132, février 2021.