Economics at your fingertips  

Cycles of credit expansion and misallocation: The Good, the Bad and the Ugly

Feng Dong and Zhiwei Xu ()

Journal of Economic Theory, 2020, vol. 186, issue C

Abstract: We offer a tractable dynamic theory where excessive credit creation by the frictional banking sector may lead to over-investment and then endogenous boom-bust cycles. We formalize the idea in a general equilibrium framework with banks and financially constrained heterogeneous firms. In the static model, a moderate credit expansion has a nonmonotonic positive impact on aggregate output, but an excessive credit expansion can trigger an interbank market crisis and result in a discontinuous sharp fall in aggregate output. By extending to a dynamic setting, we show that this mechanism can generate endogenous boom-bust business cycles despite the absence of adverse shocks.

Keywords: Credit expansion; Volume-composition tradeoff; Financial risk capacity; Financial crisis; Credit cycles (search for similar items in EconPapers)
JEL-codes: E32 E51 (search for similar items in EconPapers)
Date: 2020
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

Related works:
Working Paper: Cycles of Credit Expansion and Misallocation: The Good, The Bad and The Ugly (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jet.2020.104994

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-06-30
Handle: RePEc:eee:jetheo:v:186:y:2020:i:c:s002205312030003x