Brown Bag Seminar Leaning against the Wind and the Default Channel of Monetary Policy

Speaker: Mario Lupoli

Abstract: This paper develops a New-Keynesian DSGE model featuring household defaults and the banking sector. It does so by reconciling different strands of the credit frictions literature. Households face a binding borrowing constraint that restricts their access to external finance to a certain fraction of their housing worth. An idiosyncratic shock hits the housing projects in each time period, and if the shock is large enough, it is convenient for borrowers not to repay their loans. Entrepreneurs hire labourers and invest in deposits quoted at the policy rate. A bank matches loans with deposits but has to hold a proportional amount of capital in compliance with an exogenous capital adequacy ratio.