Costly default and skewed business cycles

We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and friction generating social costs of default. derive closed-form solution for the general equilibrium economy, providing analytical results. Endogenous generates negative skew aggregate variables positive credit spreads, as documented in empirical literature. Larger frictions strengthen asymmetry, which amplifies welfare cost fluctuations. Macro-prudential regulation alleviates both fluctuations business-cycle at expense steady-state distortion. Finally, we prove analytically existence an optimal level regulation, increases size friction.