Resuscitating the credit cycle
AbstractThis paper resuscitates the credit-cycle theory of Kiyotaki and Moore (1997) in a two-agent RBC model with conventional preferences and standard neoclassical technologies. It is shown that small transitory shocks to credit demand (or supply) can generate large, highly persistent, dampened cycles in aggregate output. Key to our results is the interaction between credit constraints and habit formation. Credit constraints based on collateralized assets mainly amplify the impact of shocks while habit formation in consumption demand mainly propagates it. Hump-shaped boom-bust cycles do not arise in the model under standard parameter values if either one of the two elements is missing.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-014.
Date of creation: 2008
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-27 (All new papers)
- NEP-BEC-2008-06-27 (Business Economics)
- NEP-CBA-2008-06-27 (Central Banking)
- NEP-DGE-2008-06-27 (Dynamic General Equilibrium)
- NEP-MAC-2008-06-27 (Macroeconomics)
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