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Financial Capacity and Output Fluctuations in an Economy with Multi-period Financial Relationships

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  • Gertler, Mark

Abstract

This paper motivates a financial propagation mechanism in the context of an intertemporal production economy with information, and with borrowers and lenders who enter multiperiod financial relationships. A key feature is that aggregate output and borrowers' "financial capacity"--the maximum overhang of past debt they may feasibly carry--are determined jointly. Expectations of future economic conditions govern financial capacity which in turn may constrain current production, especially in bad times. A small but persistent shift in aggregate conditions may have a large impact on financial capacity, making the framework capable of motivating large endogenous fluctuations in financial constraints. Copyright 1992 by The Review of Economic Studies Limited.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 59 (1992)
Issue (Month): 3 (July)
Pages: 455-72

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Handle: RePEc:bla:restud:v:59:y:1992:i:3:p:455-72

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