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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 dynamic stochastic general equilibrium model: We identify shocks that shift the demand for collateral assets and 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 Federal Reserve Bank of Atlanta in its series Working Paper with number 2010-01.

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Date of creation: 2010
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Handle: RePEc:fip:fedawp:2010-01

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Citations

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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
  2. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  3. Jan Vlcek & Scott Roger, 2012. "Macrofinancial Modeling At Central Banks," IMF Working Papers 12/21, International Monetary Fund.
  4. 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.
  5. Andrés, Javier & Boscá, José E. & Ferri, Javier, 2013. "Household debt and labor market fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1771-1795.
  6. Liu, Guangling (Dave) & Seeiso, Nkhahle E., 2012. "Basel II procyclicality: The case of South Africa," Economic Modelling, Elsevier, vol. 29(3), pages 848-857.
  7. Francois Gourio, 2011. "Credit Risk and Disaster Risk," NBER Working Papers 17026, National Bureau of Economic Research, Inc.
  8. 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.
  9. Guangling (Dave) Liu & Nkhahle Seeiso, 2011. "Business Cycle and Bank Capital Regulation: Basel II Procyclicality," Working Papers 18/2011, Stellenbosch University, Department of Economics.
  10. 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.
  11. Fajar Oktiyanto & Harmanta & Nur M. Adhi Purwanto & Aditya Rachmanto, 2014. "Monetary Macroprudential Policy Mix under Financial Frictions Mechanism with DSGE Model," EcoMod2014 6840, EcoMod.
  12. NUTAHARA Kengo, 2010. "Asset Prices and Monetary Policy in a Sticky-Price Economy with Financial Frictions," Discussion papers 10060, Research Institute of Economy, Trade and Industry (RIETI).
  13. Gourio, François, 2012. "Macroeconomic implications of time-varying risk premia," Working Paper Series 1463, European Central Bank.

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