NOMINAL DEBT, DEFAULT COSTS, AND OUTPUT

This essay analyzes how nominal debt commitments and default incidence interact in the determination of output. It specifies an environment in which concern about the deflationary impact of recessions is well-f ounded. It is shown that feedback exists between real and monetary sho cks, microeconomic outcomes, and macroeconomic performance. The mechan isms for this feedback are the contractual relationships between agent s, the state of bankruptcy, and financial intermediaries who dissemina te deadweight default costs to the macroeconomy.