A Stylized Model of Financially-Driven Business Cycles

Javier Suarez and O. Sussman

Working Papers from Centro de Estudios Monetarios Y Financieros-

Abstract: We explore the business-cycle implications of agency problems between firms and financiers. We show how these problems create liquidity shortages that can lead to corporate bankruptcy, and may generate aggregate, endogenous cycles in an economy that otherwise would have had a unique, stationary equilibrium. Some new results about the dynamics of credit rationing are derived. We argue that the modeled effect is quantitatively significant. Our model provides new insights into the role of institutions, such as bankruptcy law, in business-cycle theory.

Keywords: BUSINESS CYCLES; BUSINESS FINANCING; CREDIT; ECONOMIC MODELS (search for similar items in EconPapers)
JEL-codes: C51 E32 G32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 1997
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Working Paper: A Stylized Model of Financially-Driven Business Cycles (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:cemfdt:9722

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