The Role of Default in Macroeconomics

Goodhart, Charles and Tsomocos, Dimitrios (2011) The Role of Default in Macroeconomics. IMES Discussion Paper.


What is the main limitation of much modern macro-economic theory, among the failings pointed out by William R. White at the 2010 Mayekawa Lecture? We argue that the main deficiency is a failure to incorporate the possibility of default, including that of banks, into the core of the analysis. With default assumed away, there can be no role for financial intermediaries, for financial disturbances, or even for money. Models incorporating defaults are, however, harder to construct, in part because the representative agent fiction must be abandoned. Moreover, financial crises are hard to predict and to resolve. All of the previously available alternatives for handling failing systemically important financial institutions (SIFIs) are problematical. We end by discussing a variety of current proposals for improving the resolution of failed SIFIs.

Item Type: Other Working Paper
Keywords: macroeconomics; default; banking; finance
Subject(s): Finance
Date Deposited: 06 Mar 2012 14:33
Last Modified: 18 Sep 2018 13:07
Funders: N/A

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