Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity
Julia Thomas and
Aubhik Khan ()
No 1333, 2011 Meeting Papers from Society for Economic Dynamics
We study business cycle driven by exogenous changes in total factor productivity and credit shocks. The latter involve changes to the fraction of assets that lenders may seize in the event of default. Following changes in aggregate total factor productivity, we find that our non-contingent loan contracts drive countercyclical default risk. When firms face fixed costs of operation, this leads to a worsening of the allocation of capital in recessions that amplifies the effects of technology shocks. Following credit shocks, we see a reduction in economic activity that is qualitatively different from that following a technology shock. The response in investment is more serve, while the responses in consumption, employment and output are more gradual. In contrast to existing analysis of credit shocks with exogenous collateral constraints, our environment does not predict a slow recovery when borrowing conditions return to normal.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1333
Access Statistics for this paper
More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().