Default Recovery Rates and Aggregate Fluctuations

Giacomo Candian and Mikhail Dmitriev

Working Papers from Department of Economics, Florida State University

Abstract: Default recovery rates in the US are highly volatile and pro-cyclical. We show that state-of-the-art models with a Bernanke-Gertler-Gilchrist financial accelerator mechanism imply that recovery rates are flat over the cycle. We propose a model where financially constrained entrepreneurs face an idiosyncratic cost of redeploying liquidated capital. The resulting endogenous liquidation costs magnify the effect of the financial accelerator. We fit the model to US data and find that it explains a substantial amount of variation in recovery rates. Our mechanism alters the transmission of structural disturbances and leads to novel policy implications about the effectiveness of subsidies for liquidated assets.

Keywords: Financial accelerator; financial frictions; recovery rates; liquidation costs (search for similar items in EconPapers)
JEL-codes: C68 E44 E61 (search for similar items in EconPapers)
Pages: 41
Date: 2019-09
New Economics Papers: this item is included in nep-dge and nep-mac
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https://coss.fsu.edu/econpapers/wpaper/wp2019_09_01.pdf First version, 2019-09

Related works:
Journal Article: Default recovery rates and aggregate fluctuations (2020)
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