Credit market and macroeconomic volatility

Caterina Mendicino

No 743, Working Paper Series from European Central Bank

Abstract: This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data. JEL Classification: E21, E22, E44, G20

Keywords: asset prices.; credit frictions; reallocation of capital (search for similar items in EconPapers)
Date: 2007-03
Note: 1774743
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Credit Market and Macroeconomic Volatility (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007743

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