Credit Market Development, Asset Prices and Business Cycle

Caterina Mendicino

No 120, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: This paper studies the role of credit market development in an economy with credit frictions. I examine how the provision of credit in connection with collateral assets affects economic performance and the business cycle. In the framework of an economy in which credit constraints arise because borrowers cannot force lenders to repay, I show that, as expected, facilitating collateralized debt financing implies an increase in e¢ ciency in terms of production. Moreover, I also show how the rise in collateral/asset prices is a direct consequence of credit market development. Last, but most intriguing I demonstrate that, to a certain extent, a stronger impact of shocks is associated with a higher degree of access to the credit market. Economies at an intermediate level of credit market development are more vulnerable to shocks

Keywords: Credit Market Development; Credit Frictions; Heteroge- (search for similar items in EconPapers)
JEL-codes: E21 E30 E32 E44 (search for similar items in EconPapers)
Date: 2005-11-11
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Working Paper: Credit Market Development, Asset Prices and Business Cycle (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:120

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