Credit Market and Macroeconomic Volatility

Caterina Mendicino

No 317, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper investigate how the degree of credit market development is related to business cycle fluctuations in industrialized countries. I show that a business cycle model with collateral constraints generate a negative relation between the volatility of the cyclical component of output and the size of the credit market. I dentify the reallocation of capital as the key element in shaping out this relation. According to the model, more credit to the private sector makes output less sensitive to productivity shocks. Thus, the amplification role of credit frictions in the propagation of productivity shocks to output is greater in economies with higher degrees of credit rationing. I confront the prediction of the model with a panel of OECD countries over the last 20 years. Empirical evidence confirms that countries with a more developed credit market experience smoother fluctuations. Moreover, a greater size of the credit market dampens the propagation of productivity shocks to output and investment

Keywords: collateral constraint; reallocation of capital; asset prices (search for similar items in EconPapers)
JEL-codes: E21 E22 E44 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Working Paper: Credit market and macroeconomic volatility (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:317

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