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Credit, Bankruptcy, and Aggregate Fluctuations

Author

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  • Makoto Nakajima
  • Jose-Victor Rios-Rull

Abstract

We document the cyclical properties of unsecured consumer credit (procyclical and volatile) and of consumer bankruptcies (countercyclical and very volatile). Using a growth model with household heterogeneity in earnings and assets with access to unsecured credit (because of bankruptcy costs) and aggregate shocks, we show that the cyclical behavior of household earnings growth accounts for these properties, albeit not for the large volatility of credit. We ?nd that tilting household consumption towards goods that can be purchased on credit and a slight countercyclicality in the terms of access to credit match the sizes of credit and bankruptcy volatilities. We also ?nd that when the right to ?le for bankruptcy does not exist unsecured credit is countercyclical.

Suggested Citation

  • Makoto Nakajima & Jose-Victor Rios-Rull, 2019. "Credit, Bankruptcy, and Aggregate Fluctuations," Working Papers 19-48, Federal Reserve Bank of Philadelphia, revised 21 Nov 2019.
  • Handle: RePEc:fip:fedpwp:19-48
    DOI: 10.21799/frbp.wp.2019.48
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    References listed on IDEAS

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    1. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014.
    2. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    3. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-2699, October.
    4. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    5. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    6. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
    7. Grey Gordon, 2015. "Evaluating default policy: The business cycle matters," Quantitative Economics, Econometric Society, vol. 6(3), pages 795-823, November.
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    Citations

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    Cited by:

    1. Jang, Youngsoo & Lee, Soyoung, 2019. "A Generalized Endogenous Grid Method for Models with the Option to Default," MPRA Paper 95721, University Library of Munich, Germany.
    2. Madeira, Carlos, 2019. "Measuring the covariance risk of consumer debt portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 21-38.
    3. repec:ebl:ecbull:eb-18-00441 is not listed on IDEAS
    4. KOBAYASHI Keiichiro, 2016. "Persistent Demand Shortage Due to Household Debt," Discussion papers 16012, Research Institute of Economy, Trade and Industry (RIETI).
    5. Carlos Madeira, 2016. "Explaining the Cyclical Volatility of Consumer Debt Risk," Working Papers Central Bank of Chile 772, Central Bank of Chile.
    6. repec:eee:finsta:v:39:y:2018:i:c:p:209-220 is not listed on IDEAS

    More about this item

    Keywords

    consumer credit; heterogeneous agents; default; incomplete markets; bankruptcy; debt; business cycle;

    JEL classification:

    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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