Endogenous Cycles in a Stiglitz-Weiss Economy

Javier Suarez and Oren Sussman

No 1604, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The literature on financial imperfections and business cycles has focused on propagation mechanisms. In this paper we model a pure reversion mechanism, such that the economy may converge to a two-period equilibrium cycle. This mechanism confirms that financial imperfections may have a dramatic amplification effect. Unlike some related models, contracts are complete. Indexation is not assumed away. The welfare properties of a possible stabilizing policy are analysed. The model itself is a dynamic extension of the well-known Stiglitz-Weiss model of lending under moral hazard. Although stylized, the model still captures some important features of credit cycles.

Keywords: Credit Rationing; Endogenous Cycles (search for similar items in EconPapers)
JEL-codes: D82 E32 E51 (search for similar items in EconPapers)
Date: 1997-03
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Citations: View citations in EconPapers (48)

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Related works:
Journal Article: Endogenous Cycles in a Stiglitz-Weiss Economy (1997)
Working Paper: Endogenous Cycles in a Stiglitz-Weiss Economy (1995)
Working Paper: Endogenous Cycles in a Stiglitz-Weiss Economy (1995)
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