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Charge-offs, Defaults and U.S. Business Cycles

Christopher M. Gunn (), Alok Johri () and Marc-André Letendre ()
Additional contact information
Christopher M. Gunn: Department of Economics, Carleton University, http://www.carleton.ca/economics/people/gunn-christopher-m/
Marc-André Letendre: Department of Economics, McMaster University, https://socialsciences.mcmaster.ca/people/letendre-marc-andre

No 19-04, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We use aggregate banking data to uncover a new fact: U.S. banks counter-cyclically vary the proportion of defaulted loans that they charge-off. The variance of this “charge-offs to defaults” ratio is roughly 15 times larger than that of GDP. Canonical financial accelerator models cannot explain this variance. We show that introducing stochastic default costs into the model helps to resolve the discrepancywith the data. Estimating the augmented model on typical macroeconomic data using Bayesian techniques reveals that the estimated default cost shocks not only help account for the variance of the banking data but also help account for a significant fraction of the U.S. business cycle between 1984 and 2015.

Keywords: Charge-offs and defaults; default cost shocks; financial acceleratormodels; business cycles (search for similar items in EconPapers)
JEL-codes: E3 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ore
Date: 2019-07-05
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Published: Carleton Economic Papers

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