A Solution to the Default Risk-Business Cycle Disconnect

Vivian Yue and Enrique Mendoza

No 76, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: costs. The model replicates observed output dynamics around defaults, countercyclical spreads, high debt ratios, and key business cycle moments. Three features of the model are central for these results: working capital loans pay for imported inputs; default triggers an efficiency loss as imported inputs are replaced by imperfect domestic substitutes; and default on public and private foreign obligations occurs simultaneously.

Date: 2009
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Working Paper: A solution to the default risk-business cycle disconnect (2008)
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