Default and Aggregate Fluctuations in Storage Economies

Jose V Rios-Rul, Makoto Nakajima, Victor Rios-Rull

Research output: Chapter in Book/Report/Conference proceedingChapter

2 Scopus citations

Abstract

In this paper we extend the work of Chatterjee, Corbae, Nakajima, and Ríios-Rull (unpublished manuscript, University of Pennsylvania, 2002) to include aggregate real shocks to economic activity. The model, which includes agents that borrow and lend and a competitive credit industry, and which has endogenous default and credit limits, allows us to explore the extent to which aggregate events are amplified or smoothed via the mechanism of household bankruptcy filings. In the model agents are subject to shocks to earnings opportunities, to preferences, and to their asset position and borrow and lend to smooth consumption. On occasion, the realization of the shocks is bad enough so that agents take advantage of the opportunities provided by the U.S. Bankruptcy Code and file for bankruptcy, which wipes out their debt at the expense both of being banned from borrowing for a certain amount of time and of incurring transaction costs. The incentives to default are time-varying and depend on the individual state and general economic conditions. The model is quantitative in the sense that its fundamental parameters are estimated using U.S. data, and the model can replicate the aggregate conditions of the U.S. economy. Especially, the model accounts for the very high number of bankruptcies in the past few years. We report statistics produced by experiments with model economies with various aggregate shocks. Based on these experiments, we analyze the reaction of households to various aggregate real shocks and the interaction between households and the credit industry, and we discuss the aggregate implications of these actions and the direction in which the model might be further extended.

Original languageEnglish
Title of host publicationFrontiers In Applied General Equilibrium Modeling,
Subtitle of host publicationIn Honor of Herbert Scarf
PublisherCambridge University Press
Pages127-150
Number of pages24
Volume9780521825252
ISBN (Electronic)9780511614330
ISBN (Print)9780521825252
DOIs
StatePublished - 2005

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