Credit, Bankruptcy, and Aggregate Fluctuations

62 Pages Posted: 27 Nov 2019

See all articles by Makoto Nakajima

Makoto Nakajima

Federal Reserve Bank of Philadelphia

Jose-Victor Rios-Rull

University of Minnesota - Twin Cities

Multiple version iconThere are 4 versions of this paper

Date Written: 2019-11-21

Abstract

We document the cyclical properties of unsecured consumer credit (procyclical and volatile) and of consumer bankruptcies (countercyclical and very volatile). Using a growth model with household heterogeneity in earnings and assets with access to unsecured credit (because of bankruptcy costs) and aggregate shocks, we show that the cyclical behavior of household earnings growth accounts for these properties, albeit not for the large volatility of credit. We find that tilting household consumption towards goods that can be purchased on credit and a slight countercyclicality in the terms of access to credit match the sizes of credit and bankruptcy volatilities. We also find that when the right to file for bankruptcy does not exist unsecured credit is countercyclical.

Keywords: consumer credit, default, bankruptcy, debt, business cycle, heterogeneous agents, incomplete markets

JEL Classification: D91, E21, E32, E44, K35

Suggested Citation

Nakajima, Makoto and Rios-Rull, Jose-Victor, Credit, Bankruptcy, and Aggregate Fluctuations (2019-11-21). FRB of Philadelphia Working Paper No. 19-48, Available at SSRN: https://ssrn.com/abstract=3492189 or http://dx.doi.org/10.21799/frbp.wp.2019.48

Makoto Nakajima (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Jose-Victor Rios-Rull

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

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