Default and aggregate income

Default and aggregate income

This paper studies how default varies with aggregate income. We analyze a model in which optimal contracts enable risk sharing of privately observed, idiosyncratic income by allowing for default. Default provisions allow agents with low idiosyncratic income realizations to repay less and thus provide insurance. Default penalties ensure that only these agents default. We show that default can oc...

Aggregate Consumers' Expenditure and Income

Aggregate Income Risks and Hedging Mechanisms

Estimates are made, from time series data on real gross domestic products, of the standard deoiation of returns in markets for perpetual claims on countries’ incomes. The results indicate that there is much fundamental uncertainty to be hedged. Evidence is shmun that there may be only minimal ability to cross hedge these returns in existing capital markets. Methods of establishing markets fm pe...

Individual income , incomplete information , and aggregate consumption

In this paper I study a model of life-cycle consumption in which individuals react optimally to their own income process but ignore economy wide information. Since individual income is less persistent than aggregate income consumers will react too little to aggregate income variation. Aggregate consumption will be excessively smooth. Since aggregate information is slowly incorporated into consu...

7. Default and Aggregate Fluctuations in Storage Economies

In this paper we extend the work of Chatterjee, Corbae, Nakajima and Rı́os-Rull (unpublished manuscript, University of Pennsylvania, 2002) to include aggregate real shocks to economic activity. The model, which includes agents that borrow and lend and a competitive credit industry, and which has endogenous default and credit limits, allows us to explore the extent to which aggregate events are a...