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Credit frictions and unexpected credit crunches

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  • Salas, Sergio
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    Abstract

    In this paper I develop a simple model of dynamic general equilibrium similar to the neoclassical growth model, but where credit flows are created by agents stochastically receiving investment opportunities that allow them to create new capital. Hence agents may switch status over time from investors to workers and vice versa. Agents can issue equity up to a given fraction, so they can partially finance their investment costs externally and are in effect borrowing constrained. I characterize steady states and transitional dynamics in this environment and analyze the effects on allocations, asset prices and returns of a sudden, unexpected credit crunch: an exogenous, unanticipated decrease in the maximum fraction of investment costs that can be financed externally. I find that this type of unexpected shock generates a sizeable contraction in output and investment and produces a heterogeneous response in the return on assets, depending on the evolution of agents’ status through time.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 37 (2013)
    Issue (Month): C ()
    Pages: 161-181

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    Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:161-181

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    Web page: http://www.elsevier.com/locate/inca/622617

    Related research

    Keywords: Credit frictions; Credit crises; Asset markets;

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    1. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
    2. Taub, B, 1988. "Efficiency in a Pure Currency Economy with Inflation," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 567-83, October.
    3. Yi Wen, 2009. "When does heterogeneity matter?," Working Papers 2009-024, Federal Reserve Bank of St. Louis.
    4. Ariel Zetlin-Jones & Ali Shourideh, 2012. "External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory," 2012 Meeting Papers 321, Society for Economic Dynamics.
    5. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
    6. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
    7. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
    8. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
    9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    10. John Fernald, 2012. "A quarterly, utilization-adjusted series on total factor productivity," Working Paper Series 2012-19, Federal Reserve Bank of San Francisco.
    11. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
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