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Default Cycles

Cui, W; Kaas, L; (2020) Default Cycles. Journal of Monetary Economics 10.1016/j.jmoneco.2020.02.001. (In press).

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Abstract

Recessions are often accompanied by spikes of corporate default and credit spreads. This paper develops a tractable macroeconomic model in which credit spreads reflect the fundamental corporate default risk as well as an excess premium which responds to variation in self-fulfilling beliefs about credit conditions. The model is calibrated to evaluate the macroeconomic impact of belief shocks in comparison to standard fundamental shocks. Changes in credit market expectations generate sizable countercyclical responses of default and spreads together with endogenously persistent credit cycles, accounting for most of the volatility of corporate default and close to 40% of output growth volatility.

Type: Article
Title: Default Cycles
DOI: 10.1016/j.jmoneco.2020.02.001
Publisher version: https://doi.org/10.1016/j.jmoneco.2020.02.001
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Corporate default; Credit spreads; Belief Shocks; Financial Shocks; Risky Steady State
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10091137
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