Credit and Business Cycles

Credit and Business Cycles This paper presents two dynamic models of the economy in which credit constraints arise because creditors cannot force debtors to repay debts unless the debts are secured by collateral. The credit system becomes a powerful propagation mechanism by which the effects of shocks persist and amplify through the interaction between collateral values, borrowers' net worth and credit limits. In particular, when fixed assets serve as collateral, I show that relatively small, temporary shocks to technology or wealth distribution can generate large, persistent fluctuations in output and asset prices. JEL Classification Numbers: E32, E44 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Japanese Economic Review Wiley

Credit and Business Cycles

The Japanese Economic Review, Volume 49 (1) – Mar 1, 1998

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Publisher
Wiley
Copyright
Japanese Economic Association 1998
ISSN
1352-4739
eISSN
1468-5876
DOI
10.1111/1468-5876.00069
Publisher site
See Article on Publisher Site

Abstract

This paper presents two dynamic models of the economy in which credit constraints arise because creditors cannot force debtors to repay debts unless the debts are secured by collateral. The credit system becomes a powerful propagation mechanism by which the effects of shocks persist and amplify through the interaction between collateral values, borrowers' net worth and credit limits. In particular, when fixed assets serve as collateral, I show that relatively small, temporary shocks to technology or wealth distribution can generate large, persistent fluctuations in output and asset prices. JEL Classification Numbers: E32, E44

Journal

The Japanese Economic ReviewWiley

Published: Mar 1, 1998

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