Business cycle effects of credit shocks in a DSGE model with firm defaults

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This paper proposes a theoretical framework to analyze the relationship between credit shocks, firm defaults and volatility, and to study the impact of credit shocks on business cycle dynamics. Firms are identical ex ante but differ ex post due to different realizations of firm-specific technology shocks, possibly leading to default by some firms. The paper advances a new modelling approach for the analysis of firm defaults and financial intermediation that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model suggest that, in the steady state, a firm's default probability rises with its leverage ratio and the level of uncertainty in the economy. A positive credit shock, defined as a rise in the loan-to-deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent, even without price rigidities and habit persistence in consumption behavior.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2013-19

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Business fluctuations and cycles ; Credit and credit aggregates ; Economic models ; Financial Institutions

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Pesaran, M. Hashem ; Xu, TengTeng
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2013

Further information

• DOI: doi:10.34989/swp-2013-19
• Handle: http://hdl.handle.net/10419/80797
• Last update: 10.03.2025, 11:41 AM CET