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Evaluating default policy: The business cycle matters

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  • Grey Gordon

Abstract

More debt forgiveness directly benefits households but indirectly makes credit more expensive. How does aggregate risk affect this trade‐off? In a calibrated general equilibrium life‐cycle model, aggregate risk reduces the welfare benefit of making default very costly when the costs are borne by all households at all times. The result does not necessarily extend to state‐contingent policies. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 in particular generates a small welfare loss with or without aggregate risk.

Suggested Citation

  • Grey Gordon, 2015. "Evaluating default policy: The business cycle matters," Quantitative Economics, Econometric Society, vol. 6(3), pages 795-823, November.
    • Handle: RePEc:wly:quante:v:6:y:2015:i:3:p:795-823
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    Cited by:

    1. Kyle F Herkenhoff, 2019. "The Impact of Consumer Credit Access on Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2605-2642.
    2. Gordon, Grey, 2017. "Optimal bankruptcy code: A fresh start for some," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 123-149.
    3. António R. Antunes & Tiago Cavalcanti, 2019. "Tighter Credit and Consumer Bankruptcy Insurance," Working Papers w201921, Banco de Portugal, Economics and Research Department.
    4. Gordon Phillips & Kyle Herkenhoff, 2015. "The Impact of Consumer Credit Constraints on Earnings, Sorting, and Job Finding Rates of Displaced Workers," 2015 Meeting Papers 375, Society for Economic Dynamics.
    5. Makoto Nakajima & José-Víctor Ríos-Rull, 2014. "Credit, Bankruptcy, and Aggregate Fluctuations," NBER Working Papers 20617, National Bureau of Economic Research, Inc.
    6. Egle Jakucionyte & Sweder van Wijnbergen, 2022. "The macroeconomics of carry trade gone wrong: Corporate and consumer losses in Emerging Europe," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 30(4), pages 773-812, October.
    7. Kartik B. Athreya & Xuan S. Tam & Eric Young, 2014. "Loan Guarantees for Consumer Credit Markets," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 297-352.
    8. Gordon, Grey, 2017. "Optimal bankruptcy code: A fresh start for some," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 123-149.
    9. Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
    10. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
    11. Youngsoo Jang & Soyoung Lee, 2021. "A Generalized Endogenous Grid Method for Default Risk Models," Staff Working Papers 21-11, Bank of Canada.
    12. Hülya Eraslan & Gizem Koşar & Wenli Li & Pierre‐Daniel Sarte, 2017. "An Anatomy Of U.S. Personal Bankruptcy Under Chapter 13," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 671-702, August.
    13. Kartik Arthreya & Juan Sanchez & Xuan Tam & Eric Young, 2015. "Labor Market Upheaval, Default Regulation, and Consumer Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 32-52, January.
    14. Bernardo Guimaraes & Lucas Tumkus, 2020. "On the costs of sovereign default in quantitative models," Discussion Papers 2021, Centre for Macroeconomics (CFM).
    15. Eric M. Leeper, 2015. "Fiscal Analysis is Darned Hard," CAEPR Working Papers 2015-021, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.

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