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Credit market and macroeconomic volatility

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  • Mendicino, Caterina

Abstract

This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data. JEL Classification: E21, E22, E44, G20

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0743.

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Date of creation: Mar 2007
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Handle: RePEc:ecb:ecbwps:20070743

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Keywords: asset prices; credit frictions; reallocation of capital;

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References

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Citations

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Cited by:
  1. Lombardo, Giovanni & Vestin, David, 2007. "Welfare implications of Calvo vs. Rotemberg pricing assumptions," Working Paper Series 0770, European Central Bank.
  2. Luisa Lambertini & Caterina Mendicino & Maria Tereza Punzi, 2010. "Expectations-Driven Cycles in the Housing Market," Working Papers w201004, Banco de Portugal, Economics and Research Department.
  3. Gábor Vadas, 2007. "Wealth portfolio of Hungarian households – Urban legends and facts," MNB Occasional Papers 2007/68, Magyar Nemzeti Bank (the central bank of Hungary).
  4. Manganelli, Simone & Wolswijk, Guido, 2007. "Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market?," Working Paper Series 0745, European Central Bank.
  5. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2006. "Financial innovation and the Great Moderation: what do household data say?," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  6. Bezemer, Dirk J, 2009. "Banks As Social Accountants: Credit and Crisis Through an Accounting Lens," MPRA Paper 15766, University Library of Munich, Germany.
  7. Balázs Zsámboki, 2007. "Basel II and financial stability: An investigation of sensitivity and cyclicality of capital requirements based on QIS 5," MNB Occasional Papers 2007/67, Magyar Nemzeti Bank (the central bank of Hungary).
  8. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.

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