Kinks and Gains from Credit Cycles

Henrik Jensen, Søren Hove Ravn and Emiliano Santoro

No 13795, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Credit-market imperfections are at the centre stage of several theories of business fluctuations. Since a lot of research seeks to address the welfare consequences of stabilization policies, we revisit the fundamental question of quantifying the cost of business cycles in a model where household borrowing is subject to a collateral constraint. Business cycles occasionally change the credit-market conditions, making households temporarily unconstrained and better off. This effect can dominate the conventional losses from uncertainty, thus making fluctuations welfare-dominate certainty.

Keywords: Cost of business cycles; Collateral constraints; Precautionary saving (search for similar items in EconPapers)
JEL-codes: E20 E32 E66 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-mac
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