Book contents
- Frontmatter
- Contents
- List of Contributors
- Acknowledgments
- Introduction
- Part One General Equilibrium Theory
- Part Two Computational Methods
- Part Three Macroeconomics and Finance
- 5 Nonconvexities in Quantitative General Equilibrium Studies of Business Cycles
- 6 Lotteries for Consumers versus Lotteries for Firms
- 7 Default and Aggregate Fluctuations in Storage Economies
- 8 New Applications of General Equilibrium to Finance: Default and Collateral
- Part Four Public Finance, Development, and Climate Change
- Part Five General Equilibrium Restrictions and Estimation of Hedonic Models
- Part Six Policy Uses and Performance of AGE Models
- Index
7 - Default and Aggregate Fluctuations in Storage Economies
Published online by Cambridge University Press: 14 January 2010
- Frontmatter
- Contents
- List of Contributors
- Acknowledgments
- Introduction
- Part One General Equilibrium Theory
- Part Two Computational Methods
- Part Three Macroeconomics and Finance
- 5 Nonconvexities in Quantitative General Equilibrium Studies of Business Cycles
- 6 Lotteries for Consumers versus Lotteries for Firms
- 7 Default and Aggregate Fluctuations in Storage Economies
- 8 New Applications of General Equilibrium to Finance: Default and Collateral
- Part Four Public Finance, Development, and Climate Change
- Part Five General Equilibrium Restrictions and Estimation of Hedonic Models
- Part Six Policy Uses and Performance of AGE Models
- Index
Summary
ABSTRACT: In this paper we extend the work of Chatterjee, Corbae, Nakajima, and Ríios-Rull (unpublished manuscript, University of Pennsylvania, 2002) to include aggregate real shocks to economic activity. The model, which includes agents that borrow and lend and a competitive credit industry, and which has endogenous default and credit limits, allows us to explore the extent to which aggregate events are amplified or smoothed via the mechanism of household bankruptcy filings. In the model agents are subject to shocks to earnings opportunities, to preferences, and to their asset position and borrow and lend to smooth consumption. On occasion, the realization of the shocks is bad enough so that agents take advantage of the opportunities provided by the U.S. Bankruptcy Code and file for bankruptcy, which wipes out their debt at the expense both of being banned from borrowing for a certain amount of time and of incurring transaction costs. The incentives to default are time-varying and depend on the individual state and general economic conditions. The model is quantitative in the sense that its fundamental parameters are estimated using U.S. data, and the model can replicate the aggregate conditions of the U.S. economy. Especially, the model accounts for the very high number of bankruptcies in the past few years. We report statistics produced by experiments with model economies with various aggregate shocks. Based on these experiments, we analyze the reaction of households to various aggregate real shocks and the interaction between households and the credit industry, and we discuss the aggregate implications of these actions and the direction in which the model might be further extended.
- Type
- Chapter
- Information
- Frontiers in Applied General Equilibrium ModelingIn Honor of Herbert Scarf, pp. 127 - 150Publisher: Cambridge University PressPrint publication year: 2005
- 3
- Cited by