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Bankruptcy and Aggregate Demand

Author

Listed:
  • Adrien Auclert

    (Stanford)

  • Kurt Mitman

    (IIES)

Abstract

We study the effect of consumer default policy on macroeconomic stabilization. We focus on an economy with nominal rigidities, incomplete financial markets and heterogeneous households. Households face uninsurable idiosyncratic risk and have access to unsecured borrowing with limited commitment to repay. By adjusting the leniency of the bankruptcy code, the government can affect the extent of redistribution between high MPC borrowers and low MPC savers in downturns. If monetary policy cannot fully accommodate negative shocks, giving rise to an aggregate demand externality, macroprudential default policy can be welfare improving. We explore the welfare gains from both state-dependent and state-independent default policies.

Suggested Citation

  • Adrien Auclert & Kurt Mitman, 2018. "Bankruptcy and Aggregate Demand," 2018 Meeting Papers 1085, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1085
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    Cited by:

    1. Adrien Auclert & Will S. Dobbie & Paul Goldsmith-Pinkham, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," NBER Working Papers 25685, National Bureau of Economic Research, Inc.
    2. Gajendran Raveendranathan & Georgios Stefanidis, 2025. "The Unprecedented Fall In U.S. Revolving Credit," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(1), pages 393-451, February.
    3. Herkenhoff, Kyle & Raveendranathan, Gajendran, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," IZA Discussion Papers 12836, Institute of Labor Economics (IZA).
    4. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    5. Mallucci, Enrico, 2022. "Natural disasters, climate change, and sovereign risk," Journal of International Economics, Elsevier, vol. 139(C).
    6. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    7. Tertilt, Michèle & Exler, Florian, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    8. Broer, Tobias, 2020. "Consumption insurance over the business cycle," CEPR Discussion Papers 14579, C.E.P.R. Discussion Papers.

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