The canonical framework used to price risky debt implies that the payoff structure of levered equity resembles the payoff of a call option, while the bondholders face a payoff structure that is equivalent to that of an investor writing a put option. As a result, an increase in the payoff...

substantially different covariance with GDP growth.

In recent decades, after liberalizing their credit markets emerging economies have frequently experienced sustained output growth but also large volatility of output and asset (e.g., real estate) prices. This paper studies an economy where firms face credit constraints tied to the pledgeable...

recapitalizing or by deleveraging. By deleveraging, banks transform the initial redistribution shock into a classic credit crunch, and amplify and propagate the fi…nancial shock to the real economy. In my benchmark experiment, credit losses (that is, a redistribution shock) of about 4% of GDP...