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On The Cyclicality Of Credit

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  • Demirel, Ufuk Devrim

Abstract

This study documents the cyclical properties of business credit in the United States and in the Euro area and constructs a theoretical model that can successfully replicate the observed characteristics. I find that real business loans lag output; i.e., business credit is more strongly correlated with past output than with current output. Furthermore, real business loans correlate negatively with future output and investment and positively with past output and investment. I show that a fairly standard model of business and credit fluctuations with agency costs can neither generate the lagging behavior of business credit nor induce the observed cross-correlation patterns of output, investment, and business loans. I introduce a costly financial intermediation mechanism into an otherwise standard macroeconomic framework and show that the evolution of intermediary balance sheets and the interaction of intermediation and agency costs can induce the observed regularities.

Suggested Citation

  • Demirel, Ufuk Devrim, 2014. "On The Cyclicality Of Credit," Macroeconomic Dynamics, Cambridge University Press, vol. 18(5), pages 1129-1160, July.
    • Handle: RePEc:cup:macdyn:v:18:y:2014:i:05:p:1129-1160_00
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    Cited by:

    1. Airaudo, Marco & Olivero, María Pía, 2014. "Optimal Monetary Policy with Counter-Cyclical Credit Spreads," School of Economics Working Paper Series 2014-1, LeBow College of Business, Drexel University.
    2. Marco Airaudo & María Pía Olivero, 2019. "Optimal Monetary Policy with Countercyclical Credit Spreads," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 787-829, June.

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