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Do Credit Constraints Amplify Macroeconomic Fluctuations?

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  • Zheng Liu
  • Pengfei Wang
  • Tao Zha

Abstract

Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model - we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0910.

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Date of creation: Dec 2009
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Handle: RePEc:emo:wp2003:0910

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Do Credit Constraints Amplify Macroeconomic Fluctuations?
    by Christian Zimmermann in NEP-DGE blog on 2010-01-12 04:45:01
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Cited by:
  1. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Debt and Labor Market Fluctuations," Working Papers 1102, International Economics Institute, University of Valencia.
  2. Jessica Roldan Pena & Virginia Olivella, 2010. "Re-examining the role of financial constraints in business cycles: is something wrong with the credit multiplier?," 2010 Meeting Papers 377, Society for Economic Dynamics.
  3. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  4. Nutahara, Kengo, 2010. "Asset prices and monetary policy in a sticky-price economy with financial frictions," MPRA Paper 24113, University Library of Munich, Germany.
  5. Liu, Guangling (Dave) & Seeiso, Nkhahle E., 2012. "Basel II procyclicality: The case of South Africa," Economic Modelling, Elsevier, vol. 29(3), pages 848-857.
  6. Jianjun Miao & PENGFEI WANG, 2010. "Credit Risk and Business Cycles," Boston University - Department of Economics - Working Papers Series WP2010-033, Boston University - Department of Economics.
  7. Guangling (Dave) Liu & Nkhahle E. Seeiso, 2011. "Business Cycle and Bank Capital Regulation: Basel II Procyclicality," Working Papers 221, Economic Research Southern Africa.
  8. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2011. "The great escape? A quantitative evaluation of the Fed’s liquidity facilities," Staff Reports 520, Federal Reserve Bank of New York.
  9. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
  10. Francois Gourio, 2010. "Credit risk and Disaster risk," 2010 Meeting Papers 112, Society for Economic Dynamics.
  11. Gourio, François, 2012. "Macroeconomic implications of time-varying risk premia," Working Paper Series 1463, European Central Bank.
  12. Jan Vlcek & Scott Roger, 2012. "Macrofinancial Modeling at Central Banks: Recent Developments and Future Directions," IMF Working Papers 12/21, International Monetary Fund.

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