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Costly default and asymetric real business cycles

Fève, Patrick, Garcia Sanchez, Pablo, Moura, Alban and Pierrard, Olivier (2019) Costly default and asymetric real business cycles. TSE Working Paper, n. 19-1048, Toulouse

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Abstract

We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and a financial friction generating social costs of default. We provide a closed-form solution for the general equilibrium of the economy under specific assumptions, allowing for analytic results and straightforward simulations. Endogenous default generates asymmetric business cycles and our model replicates both the negative skew of GDP and the positive skew of credit spreads found in US data. Stronger financial frictions cause a rise in asymmetry and amplify the welfare costs of default. A Pigouvian tax on financial intermediation mitigates most of these negative effects at the cost of a steady-state distortion.

Item Type: Monograph (Working Paper)
Language: English
Date: November 2019
Place of Publication: Toulouse
Uncontrolled Keywords: Real Business Cycle model, default, financial frictions, asymmetry, skewness.
JEL Classification: E32 - Business Fluctuations; Cycles
E44 - Financial Markets and the Macroeconomy
G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 14 Nov 2019 10:54
Last Modified: 14 Nov 2019 10:54
["eprint_fieldname_oai_identifier" not defined]: oai:tse-fr.eu:123694
URI: http://publications.ut-capitole.fr/id/eprint/32905

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