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Self-Fulfilling Credit Cycles

Costas Azariadis () and Leo Kaas

No 2012-16, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: This paper argues that self-fulfilling beliefs in credit conditions can generate endogenously persistent business cycle dynamics. We develop a tractable dynamic general equilibrium model with idiosyncratic firm 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 complementarity 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: Limited enforcement; Credit cycles; Sunspots (search for similar items in EconPapers)
JEL-codes: D92 E32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-09-20
New Economics Papers: this item is included in nep-bec and nep-dge
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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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