@article{Business:1644,
      recid = {1644},
      author = {Pesaran, M. Hashem and Xu, TengTeng},
      title = {Business Cycle Effects of Credit Shocks in a DSGE Model  with Firm Defaults},
      address = {2013},
      pages = {1 online resource (iii, 46 pages)},
      abstract = {This paper proposes a theoretical framework to analyze the  relationship between credit shocks, firm defaults and  volatility, and to study the impact of credit shocks on  business cycle dynamics. Firms are identical ex ante but  differ ex post due to different realizations of  firm-specific technology shocks, possibly leading to  default by some firms. The paper advances a new modelling  approach for the analysis of firm defaults and financial  intermediation that takes account of the financial  implications of such defaults for both households and  banks. Results from a calibrated version of the model  suggest that, in the steady state, a firm’s default  probability rises with its leverage ratio and the level of  uncertainty in the economy. A positive credit shock,  defined as a rise in the loan-to-deposit ratio, increases  output, consumption, hours and productivity, and reduces  the spread between loan and deposit rates. The effects of  the credit shock tend to be highly persistent, even without  price rigidities and habit persistence in consumption  behavior.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/1644},
      doi = {https://doi.org/10.34989/swp-2013-19},
}