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Credit, Bankruptcy, and Aggregate Fluctuations

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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.
  • Handle: RePEc:fip:fedpwp:19-48
    DOI: 10.21799/frbp.wp.2019.48
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    Keywords

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

    JEL classification:

    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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