Forbearance vs Foreclosure in a General Equilibrium Model

We build a business cycle model characterized by endogenous firms dynamics, where banks may prefer debt renegotiation, i.e. non-performing exposures, to outright borrowers default. find that renegotiations only do not have adverse effects in the event of financial crisis episodes, but large share is associated with sharp deterioration economic activity two cases. First, if there are congestion ability monitor loans. Second, such loans adversely affect commercial banks’ moral hazard problem due their opacity. Aggressive interest rate reductions and quantitative easing limit defaults output contraction caused crisis, without ad- verse on entry new, more productive firms. The shows observed long-run trend might be persistent reduction technological advancements which drive firm rates turnover.