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Counter‐Cyclical Defaults in Costly State Verification Models

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  • Michele Piffer

Abstract

This paper shows that a pro‐cyclical risk‐free rate can solve the problem of pro‐cyclical defaults in costly state verification models. The paper computes numerically the coefficient of a Taylor rule that delivers pro‐cyclical output, pro‐cyclical capital and counter‐cyclical defaults. This parametrization is consistent with the empirical evidence on Taylor rules.

Suggested Citation

  • Michele Piffer, 2026. "Counter‐Cyclical Defaults in Costly State Verification Models," Manchester School, University of Manchester, vol. 94(2), pages 218-233, March.
    • Handle: RePEc:bla:manchs:v:94:y:2026:i:2:p:218-233
    DOI: 10.1111/manc.70015
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