Recently, Professor Wang Pengfei, Boya Distinguished Professor at Peking University and Dean of PHBS, published a paper titled "Aggregate demand externality and self-fulfilling default cycles" in the Journal of Monetary Economics (Volume 156, December 2025, 103827). The paper is co-authored by Professor Jess Benhabib from the Department of Economics at New York University, Associate Professor Dong Feng from the School of Economics and Management at Tsinghua University, and Xu Zhenyang, a doctoral student in the class of 2022. Professor Wang Pengfei is the corresponding author.

# Article Introduction #

Title：

Aggregate demand externality and self-fulfilling default cycles 

Author：

Jess Benhabib, Feng Dong, Pengfei Wang，Zhenyang XuAbstract：
Recurrent clustered episodes of corporate default are a long-standing puzzle that standard models driven by observable fundamentals struggle to explain. We develop a general equilibrium model where demand externality generates such default cycles endogenously through a self-fulfilling mechanism. In our framework, a decline in aggregate output reduces individual firm revenues and values, raising default risk. The subsequent exit of defaulting firms further depresses aggregate output, creating a positive feedback loop and pessimistic expectations about defaults can become self-fulfilling. This mechanism generates multiple equilibria and features endogenous, sentiment-driven default cycles. A global dynamic analysis using Bogdanov–Takens bifurcation reveals a rich set of dynamics, including periodic orbits, that are overlooked by standard local analysis. Our framework thus provides a microfounded explanation for business cycle patterns driven by internal economic forces, as emphasized by the empirical literature of endogenous business cycles.