Costly default and asymmetric real business cycles

Patrick Fève, Pablo Garcia Sanchez, Alban Moura and Olivier Pierrard

No 134, BCL working papers from Central Bank of Luxembourg

Abstract: 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.

Keywords: Real Business Cycle model; default; financial frictions; asymmetry; skewness (search for similar items in EconPapers)
JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2019-11
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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https://www.bcl.lu/en/publications/Working-papers/134/BCLWP134.pdf (application/pdf)

Related works:
Journal Article: Costly default and skewed business cycles (2021)
Working Paper: Costly default and skewed business cycle (2021)
Working Paper: Costly Default And Asymmetric Real Business Cycles (2019)
Working Paper: Costly default and asymetric real business cycles (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp134

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