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The business cycles driven by loan defaults via credit creation: An agent-based perspective

Miao Yu, Zijian Feng and Yougui Wang

Finance Research Letters, 2022, vol. 48, issue C

Abstract: This paper presents an agent-based model consisting of multiple households, multiple firms, one commercial bank and one central bank, with the aim of demonstrating loan defaults drive business cycles via credit creation. The simulations show us explicit patterns of cycles for some key variables and possible underlying mechanisms are proposed. We construct a SVAR model on the simulation data, and the impulse response results, which are testified to be robust, provide some explanations of the possible causality chains. Our work facilitates the understandings about the procyclicality of bank capital as well as the bank capital channel of monetary policy.

Keywords: Loan default; Bank capital; Business cycle; Credit crunch; Credit creation (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322001404

DOI: 10.1016/j.frl.2022.102846

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