Fève, Patrick, Garcia Sanchez, Pablo, Moura, Alban and Pierrard, Olivier (2021) Costly default and skewed business cycle. European Economic Review, vol. 132.

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Identification Number : 10.1016/j.euroecorev.2020.103630


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 derive a closed-form solution for the general equilibrium of the economy, providing analytical results. Endogenous default generates a negative skew for aggregate variables and a positive skew for credit spreads, as documented in the empirical literature. Larger financial frictions strengthen asymmetry, which amplifies the welfare cost of fluctuations. Macro-prudential regulation alleviates both the cost of fluctuations and business-cycle asymmetry, at the expense of a steady-state distortion. Finally, we prove analytically the existence of an optimal level of regulation, which increases with the size of the financial friction.

Item Type: Article
Language: English
Date: February 2021
Refereed: Yes
Place of Publication: Amsterdam
Uncontrolled Keywords: Real Business Cycle model, Default, Financial frictions, Asymmetry, Optimal regulation
JEL Classification: E32 - Business Fluctuations; Cycles
E44 - Financial Markets and the Macroeconomy
G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 25 Feb 2021 09:40
Last Modified: 16 Sep 2021 08:34
OAI Identifier: oai:tse-fr.eu:125115
URI: https://publications.ut-capitole.fr/id/eprint/42232

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