Behavioural Credit Cycles

Domenico Delli Gatti and Gabriele Iannotta

No 9954, CESifo Working Paper Series from CESifo

Abstract: We explore the intertwined dynamics of asset prices and the macroeconomy in a Behavioural model of Credit Cycles (BCC) characterized by a credit friction à la Kiyotaki and Moore and heterogeneous expectations cum heuristic switching à la Brock and Hommes. This behavioural approach allows to better understand and replicate the effects of shocks. In the absence of actual defaults, following a positive productivity shock, our behavioural model (BCC Mark I) generates hump-shaped impulse-response functions that are more realistic than those generated by the same shock in a corresponding model with rational expectations (RCC). When the behavioural model allows also for defaults (BCC Mark II), a productivity shock triggers ample and persistent fluctuations (if the intensity of choice of the lender is sufficiently high), a feature that is absent in BCC Mark I (and of course in RCC).

Keywords: credit market; collateral constraints; heterogeneous expectations; bankruptcy; boom bust cycles (search for similar items in EconPapers)
JEL-codes: D84 E32 E44 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Behavioural credit cycles (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9954

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