Changing credit limits, changing business cycles
Henrik Jensen (),
Søren Hove Ravn and
Emiliano Santoro ()
European Economic Review, 2018, vol. 102, issue C, 211-239
In the last half-century, capital markets across the industrialized world have undergone massive deregulation, involving large increases in the loan-to-value (LTV) ratios of households and firms. We study the business-cycle implications of this phenomenon in an estimated dynamic general equilibrium model with multiple credit-constrained agents. A progressive relaxation of credit constraints initially leads to both higher macroeconomic volatility and stronger comovement between debt and real activity. This pattern reverses at LTV ratios not far from those currently observed in many advanced economies, due to credit constraints becoming non-binding more often. The non-monotonic relationship between credit market conditions and macroeconomic fluctuations carries important lessons for regulatory and macroprudential policymakers. While reducing the average LTV ratio may unintentionally increase macroeconomic volatility, a countercyclical LTV ratio proves to be successful in dampening business cycle fluctuations and, most importantly, avoiding dramatic output drops.
Keywords: Occasionally binding credit constraints; Business cycles; Capital-market liberalization; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Changing Credit Limits, Changing Business Cycles (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:102:y:2018:i:c:p:211-239
Access Statistics for this article
European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer
More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().