Bankruptcy and Aggregate Demand

Adrien Auclert and Kurt Mitman

No 1085, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effect of consumer default policy on macroeconomic stabilization. We focus on an economy with nominal rigidities, incomplete financial markets and heterogeneous households. Households face uninsurable idiosyncratic risk and have access to unsecured borrowing with limited commitment to repay. By adjusting the leniency of the bankruptcy code, the government can affect the extent of redistribution between high MPC borrowers and low MPC savers in downturns. If monetary policy cannot fully accommodate negative shocks, giving rise to an aggregate demand externality, macroprudential default policy can be welfare improving. We explore the welfare gains from both state-dependent and state-independent default policies.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-mac
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