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

M Hashem Pesaran () and TengTeng Xu

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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, possibly 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 highlights 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.

JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge and nep-mac
Date: 2011-10-07
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http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1159.pdf

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