Essays on Quantitative Macroeconomics of Default
This dissertation consists of two essays, which study agents' default under dynamic stochastic general equilibrium models with heterogenous agents and financial intermediaries who charge a risk premium corresponding to the agent's default risk. We use computational tools to address the economic issues quantitatively in both chapters.Chapter 1 studies consumer bankruptcy over the business cycle in the U.S. economy. The number of consumer bankruptcies is countercyclical, which is not obvious in economic models with forward-looking agents. This chapter constructs a heterogeneous-agent general equilibrium model with capital market imperfections and households' default option. Households face aggregate productivity shocks as well as idiosyncratic shocks to labor efficiency, discount factor, and liability loss. The key contribution of this chapter is that our quantitative model successfully replicates the countercyclical property and the high volatility of bankruptcy rate by introducing surprising aggregate shocks: households and financial intermediaries cannot observe a forthcoming aggregate shock before making a financial contract.Chapter 2 studies firm defaults and corporate taxation reforms in the Japanese economy. The motivation of chapter 2 comes from the fact that standard corporate income taxes (SCIT) distort a firm's behavior. To eliminate tax advantages from borrowing over holding equity in SCIT, tax professionals have designed two polar reform proposals, namely the Comprehensive Business Income Tax (CBIT) and the Allowance for Corporate Equity (ACE). Economists traditionally favor an ACE system in the closed economy since it offsets a firm's investment distortion and it obtains neutrality between debt and equity finance. However, this chapter will cast doubt on the superiority of ACE over CBIT in the closed economy quantitatively by constructing a heterogeneous-firm general equilibrium model with corporate income taxes, financial frictions, firms' default option and idiosyncratic shocks to firm's productivity. Once the firms' heterogeneity and default options are introduced, the neutrality of the ACE system no longer holds. We find that the ACE and CBIT tax reforms significantly decrease the debt ratio and the firm's default rate. We also find that, in our closed economy setup, welfare gains from the reforms are almost the same at 1.08% and 1.10%, respectively, in terms of consumption compensation.
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