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Costly Default And Asymmetric Real Business Cycles

Author

Listed:
  • Patrick Fève

    (Toulouse School of Economics and Université Toulouse 1)

  • Pablo Garcia Sanchez

    (Banque centrale du Luxembourg, Département Economie et Recherche)

  • Alban Moura

    (Banque centrale du Luxembourg, Département Economie et Recherche)

  • Olivier Pierrard

    (Banque centrale du Luxembourg, Département Economie et Recherche)

Abstract
We augment a simple Real Business Cycle model with financial interme-diaries 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.

Suggested Citation

  • Patrick Fève & Pablo Garcia Sanchez & Alban Moura & Olivier Pierrard, 2019. "Costly Default And Asymmetric Real Business Cycles," LIDAM Discussion Papers IRES 2019018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2019018
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    References listed on IDEAS

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    More about this item

    Keywords

    Real Business Cycle model; default; financial frictions; asymmetry; skewness;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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