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Optimal Credit Cycles

Zachary Bethune (), Tai-Wei Hu and Guillaume Rocheteau ()
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Tai-Wei Hu: Northwestern University

Review of Economic Dynamics, 2018, vol. 27, 231-245

Abstract: Under which conditions are extrinsic credit fluctuations socially optimal? In order to answer this question we characterize constrained-efficient allocations in an infinite horizon, two-good economy with limited commitment for two market structures, random pairwise meetings and centralized meetings. If agents meet bilaterally, then constrained-efficient allocations specify the highest stationary output level that is incentive feasible, and it is implemented with take-it-or-leave-it offers and "not-too-tight" solvency constraints. If agents meet in a centralized location, constrained-efficient allocations can be non-stationary, in which case they feature a credit boom followed by stagnation due to "too-tight" solvency constraints. We also characterize constrained-efficient allocations under partial commitment by the planner. If commitment is low, the economy experiences rare but pronounced credit crunches. If commitment is high, the economy experiences infrequent but large credit booms. (Copyright: Elsevier)

Keywords: Credit cycles; Limired commitment; Money (search for similar items in EconPapers)
JEL-codes: D83 E32 E51 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/

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