Behavioural credit cycles

Domenico Delli Gatti and Gabriele Iannotta

No def119, DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: We explore the intertwined dynamics of asset prices and the macroeconomy in a Behavioural model of Credit Cycles (BCC) characterized by a credit friction a' la Kiyotaki and Moore and heterogeneous expectations cum heuristic switching a la Brock and Hommes. This behavioural approach allows to better understand and replicate the effects of shocks. In the absence of actual defaults, following a positive productivity shock, our behavioural model (BCC Mark I) generates hump-shaped impulse-response functions that are more realistic than those generated by the same shock in a corresponding model with rational expec- tations (RCC). When the behavioural model allows also for defaults (BCC Mark II), a productivity shock triggers ample and persistent uctuations (if the intensity of choice of the lender is suciently high), a feature that is absent in BCC Mark I (and of course in RCC).

Keywords: Credit Market; Collateral Constraints; Heterogeneous Expectations; Bankruptcy; Boom Bust Cycles. (search for similar items in EconPapers)
JEL-codes: D84 E32 E44 (search for similar items in EconPapers)
Pages: 67
Date: 2022-09
New Economics Papers: this item is included in nep-fdg
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Working Paper: Behavioural Credit Cycles (2022)
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