 Corporate Default, Investment, and the U.S. Great DepressionMPRA Paper from University Library of Munich, Germany Abstract: This paper investigates the role of corporate bond default risk during the U.S. Great Depression, and propose that the default risk is an effective amplifier of adverse technology and financial shocks. On the one hand, the massive wave of corporate bond defaults directly idled a considerable amount of capital, which was detrimental to production, investment, and employment. On the other hand, the indebted firms were inclined to cut more investment during the economic downturn, as they were also concerned about the increasing default risks besides the awful economic outlook. Based on the prominent work by Cooley and Quadrini(2001) and Miao and Wang(2010), I build a rational expectations DSGE model with firm default risk, which generates simulated investment dynamics that are much closer to the actual 1930s data series than in the standard RBC model. The model also predicts satisfactory declines in consumption, working hours and output. Moreover, I find that the default recovery rate decline caused by adverse financial shocks explains well the increasing corporate bond yield in the early 1930s. Keywords: Corporate Default; Investment; and the U.S. Great Depression (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:77242 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.