Endogenous credit cycles

Alberto Martin

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: I develop an overlapping-generations framework in which changes in lending standards generate endogenous cycles. In my economy, entrepreneurs who are privately informed about the quality of their projects need to borrow funds. Intermediaries screen entrepreneurs both through the amount of investment undertaken and through the level of entrepreneurial net worth. I show that endogenous regime switches in financial contracts —from pooling to separating and vice-versa— may generate fluctuations even in the absence of exogenous shocks. When the economy is in the pooling (separating) regime, lending standards seem “lax” (“tight”) and investment is high (low). Differently from the existing literature, my model does not require entrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregate investment.

Keywords: Endogenous cycles; financial accelerator; adverse selection; pooling equilibrium; separating equilibrium (search for similar items in EconPapers)
JEL-codes: D82 E32 E44 (search for similar items in EconPapers)
Date: 2004-11, Revised 2008-08
New Economics Papers: this item is included in nep-fmk and nep-mac
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Citations: View citations in EconPapers (20)

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