Credit, Bankruptcy, and Aggregate Fluctuations

Nakajima, Makoto; Ríos-Rull, José-Víctor

doi:10.21799/frbp.wp.2019.48

Working Paper

Credit, Bankruptcy, and Aggregate Fluctuations

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 ?nd 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 ?nd that when the right to ?le for bankruptcy does not exist unsecured credit is countercyclical.

Keywords: consumer credit; default; bankruptcy; debt; business cycles; heterogeneous agents; incomplete markets;

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

https://doi.org/10.21799/frbp.wp.2019.48