A behavioral model of the credit cycle

Barbara Annicchiarico (), Silvia Surricchio and Robert Waldmann ()

Journal of Economic Behavior & Organization, 2019, vol. 166, issue C, 53-83

Abstract: In a behavioral variant of a New Keynesian model, in which individuals use simple heuristic rules to forecast future inflation and output, if there are limits on the amount of debt that economic agents are allowed to bear, we observe occasionally severe downturns. Differences in beliefs combined with borrowing constraints tend to dampen expansions, but give rise to a chain reaction that exacerbates the recessions. The model is an example of endogenous credit cycles with expansions, severe recessions, and persistent inequality in the distribution of wealth. Monetary policy can both stabilize the economy and cause increased average output.

Keywords: Credit cycle; Heuristic rules; Behavioral macroeconomics; Monetary policy (search for similar items in EconPapers)
JEL-codes: D83 E10 E32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Working Paper: A Behavioral Model of the Credit Cycle (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:166:y:2019:i:c:p:53-83

DOI: 10.1016/j.jebo.2019.09.010

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