Resuscitating the credit cycle

Patrick Pintus and Yi Wen

No 2008-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper resuscitates the credit-cycle theory of Kiyotaki and Moore (1997) in a two-agent RBC model with conventional preferences and standard neoclassical technologies. It is shown that small transitory shocks to credit demand (or supply) can generate large, highly persistent, dampened cycles in aggregate output. Key to our results is the interaction between credit constraints and habit formation. Credit constraints based on collateralized assets mainly amplify the impact of shocks while habit formation in consumption demand mainly propagates it. Hump-shaped boom-bust cycles do not arise in the model under standard parameter values if either one of the two elements is missing.

Keywords: Credit (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
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