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A Solution to the Default Risk-Business Cycle Disconnect

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  • Vivian Z. Yue

    (New York University)

  • Enrique G. Mendoza

    (University of Maryland)

Abstract

costs. The model replicates observed output dynamics around defaults, countercyclical spreads, high debt ratios, and key business cycle moments. Three features of the model are central for these results: working capital loans pay for imported inputs; default triggers an efficiency loss as imported inputs are replaced by imperfect domestic substitutes; and default on public and private foreign obligations occurs simultaneously.

Suggested Citation

  • Vivian Z. Yue & Enrique G. Mendoza, 2009. "A Solution to the Default Risk-Business Cycle Disconnect," 2009 Meeting Papers 76, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:76
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