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Endogenous Cycles in a Stiglitz-Weiss Economy

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Author Info
Suarez, Javier
Sussman, Oren

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Abstract

The literature on financial imperfections and business cycles has focused on propagation mechanisms. In this paper we model a pure reversion mechanism, such that the economy may converge to a two-period equilibrium cycle. This mechanism confirms that financial imperfections may have a dramatic amplification effect. Unlike some related models, contracts are complete. Indexation is not assumed away. The welfare properties of a possible stabilizing policy are analysed. The model itself is a dynamic extension of the well-known Stiglitz-Weiss model of lending under moral hazard. Although stylized, the model still captures some important features of credit cycles.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1604.

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Date of creation: Mar 1997
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Handle: RePEc:cpr:ceprdp:1604

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Related research
Keywords: Credit Rationing; Endogenous Cycles;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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  1. Hans Gersbach, 2002. "Financial Intermediation and the Creation of Macroeconomic Risks," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Javier Suarez & Oren Sussman, 2007. "Financial distress, bankruptcy law and the business cycle," Annals of Finance, Springer, vol. 3(1), pages 5-35, January. [Downloadable!] (restricted)
    Other versions:
  3. James Dow & Itay Goldstein & Alexander Guembel, 2005. "Commitment to Overinvest and Price Informativeness," OFRC Working Papers Series 2005fe18, Oxford Financial Research Centre. [Downloadable!]
  4. Reichlin, Pietro & Siconolfi, Paolo, 2000. "Optimal Debt Contracts and Moral Hazard Along the Business Cycle," CEPR Discussion Papers 2351, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Alberto Martin, 2004. "Endogenous Credit Cycles," Economics Working Papers 916, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2008. [Downloadable!]
  6. Fabrizio Mattesini, 2003. "Financial Intermediation as a Source of Aggregate Instability," CEIS Research Paper 35, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
  7. Biais, Bruno & Mariotti, Thomas, 2008. "Credit, Wages and Bankruptcy Laws," IDEI Working Papers 289, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  8. Andrea Attar & Eloisa Campioni, 2002. "Costly State Verification And Debt Contracts," Departmental Working Papers 172, Tor Vergata University, CEIS. [Downloadable!]
  9. Huizinga, Harry & Zhu, Dantao, 2006. "Financial Structure and Macroeconomic Volatility: Theory and Evidence," CEPR Discussion Papers 5697, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Rafael Repullo & Javier Suarez, 1999. "Entrepreneurial moral hazard and bank monitoring: a model of the credit channel," Discussion Paper / Institute for Empirical Macroeconomics 129, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  11. ATTAR, AndrŽa, 2003. "Financial contracting along the business cycle," CORE Discussion Papers 2003069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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