Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults

Mohammad Pesaran and TengTeng Xu

No 6027, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper proposes a theoretical framework to analyze the impacts of credit and technology shocks on business cycle dynamics, where firms rely on banks and households for capital financing. Firms are identical ex ante but differ ex post due to different realizations of firm specific technology shocks, possible leading to default by some firms. The paper advances a new modelling approach for the analysis of financial intermediation and firm defaults that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model highlight the role of financial institutions in the transmission of credit and technology shocks to the real economy. A positive credit shock, defined as a rise in the loan to deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent even without price rigidities and habit persistence in consumption behaviour.

Keywords: bank credit; financial intermediation; firm heterogeneity and defaults; interest rate spread; real financial linkages (search for similar items in EconPapers)
JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2011-10
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults (2011)
Working Paper: Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults (2011)
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