Canadian paper proposes new DSGE model for analysing credit shocks
A Bank of Canada working paper published today finds that in steady state equilibriums, the probability of a company defaulting rises with its leverage ratio and the level of uncertainty in the economy.
The paper, Business Cycle Effects of Credit Shocks in a DSGE Model with Firm Defaults by Hashem Pesaran and TengTeng Xu, creates a dynamic stochastic general equilibrium model to analyse the effects of credit shocks on the real economy.
The model, when analysing defaults and financial
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