Join Wei Cui for this week's Macro Seminar
16:00 - 17:30
Economics Common Room 5B.307
Lectures, talks and seminars
Economics, Department of
In this Department of Economics Macro Seminar Wei Cui, from UCL, discusses his paper on Default Cycles
Recessions are often accompanied by spikes of corporate default and prolonged declines of business credit. We show that credit and default cycles can result from variations of self-fulfilling beliefs about credit market conditions. We develop a tractable macroeconomic model in which credit contracts reflect the expected default risk of borrowing firms.
We calibrate the model to evaluate the macroeconomic impact of sunspots and fundamental shocks. Self-fulfilling changes in credit market expectations generate sizable reactions in default rates together with endogenously persistent credit and output cycles, accounting for most of the volatility of corporate default and over 20% of output volatility.