Credit Supply and Output Volatility

Cristiano Cantore and Mathan Satchi

Studies in Economics from School of Economics, University of Kent

Abstract: The link between aggregate profits and investment has been widely analysed through the impact of profits on net worth and therefore the firm’s ability to borrow, in the presence of credit market imperfections. How the business cycle is affected if profits also affect investment through an impact on savings and therefore the intermediary’s ability to lend, is the topic of this paper. We find that the fluctuations in the supply of credit that result from this may significantly amplify output responses to shocks in comparison to a situation where the net worth mechanism operates alone.

Keywords: Business Cycles; Credit Market Imperfections; Loan Supply (search for similar items in EconPapers)
JEL-codes: E32 E44 E51 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-bec and nep-mac
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