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Self-fulfilling credit cycles

Costas Azariadis () and Leo Kaas

No 2012-047, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complemen- tarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.

Keywords: Credit; Business cycles (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Related works:
Journal Article: Self-Fulfilling Credit Cycles (2016) Downloads
Working Paper: Self-Fulfilling Credit Cycles (2015) Downloads
Working Paper: Self-Fulfilling Credit Cycles (2015) Downloads
Working Paper: Self-Fulfilling Credit Cycles (2014) Downloads
Working Paper: Self-Fulfilling Credit Cycles (2012) Downloads
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