Counter‐Cyclical Defaults in Costly State Verification Models
ABSTRACT This paper shows that a pro‐cyclical risk‐free rate can solve the problem of pro‐cyclical defaults in costly state verification models. The paper computes numerically the coefficient of a Taylor rule that delivers pro‐cyclical output, pro‐cyclical capital and counter‐cyclical defaults. This parametrization is consistent with the empirical evidence on Taylor rules.
Authors
- Michele Piffer (ORCID: https://orcid.org/0009-0002-4157-2147)
Institutions
- King's College London (GB)
- London South Bank University (GB)
- Bank of England (GB)
Publication Details
- Journal
- Manchester School
- Published
- 2025-11-06
- DOI
- https://doi.org/10.1111/manc.70015
- Primary Topic
- Credit Risk and Financial Regulations
- Type
- article
- Field-Weighted Citation Impact
- 0.00