Abstract: The COVID -19 epidemic has an unprecedented impact on real economy, raising the risk of default on household and corporate debt. In addition, the global financial crisis demonstrated that debt default may cause systematic financial risk through its transmission in the financial system. This paper aims to study the transmission mechanism of debt default in the real sector and evaluate the role of monetary policy and macroprudential policy. This paper firstly identifies the transmission effect of banking channel on debt fluctuations by analyzing the joint dynamics between household debt and corporate debt in China. Then this paper builds a NK-DSGE model including the banking sector with balance sheet constraint to capture the joint dynamics between household debt and corporate debt. In addition, this paper uses numerical simulation to analyze the transmission mechanism of default shock on household debt and corporate debt, and evaluate the role of the two-pillar regulation framework. This study finds that debt default in the real sector has a systematic impact on the real estate market, credit market and the real economy through banking channel. In terms of policy response, the two-pillar regulation framework can slow down the decline of house prices and credit contraction. Compared with the“capital type”macroprudential tool, the“credit type” macroprudential tool can coordinate monetary policy to guide commercial banks to increase credit support for enterprises, thus buffering the negative impact of debt default on the real economy.

Keywords: Debt Default；Banking Channel；Two-Pillar Regulation；DSGE Mode