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Default Cycles




Speaker: Dr Wei Cui

Series: Department of Economics Seminar Series 2016-17: Spring Term

This seminar is part of the Department of Economics Seminar Series 2016-17. The seminars are open to all - no registration necessary.


Corporate default rates are counter-cyclical and are often clustered over prolonged episodes. This paper develops a tractable macroeconomic model in which persistent default cycles are the outcome of variations in self-fulfilling beliefs about credit market conditions. Interest spreads and leverage ratios are determined in optimal debt contracts that reflect the expected default risk of borrowing firms. Next to sunspot shocks, the model also features other financial shocks that are unrelated to default risk. We calibrate the model to evaluate the impact of the different financial shocks on the credit market and on output dynamics. Self-fulfilling credit market expectations trigger sizeable reactions in default rates and generate endogenously persistent credit and output cycles. All credit market shocks together account for over 80% of the variance of U.S. GDP growth during 1982-2015.

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When and where

3.00pm - 4.30pmWednesday 1st February 2017

D221 Rhind Building City, University of London St John Street London EC1R 0JD United Kingdom

Contact Details

Sotiris Georganas

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