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A Stylized Model of Financially-Driven Business Cycles

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Author Info

  • Suarez, J.
  • Sussman, O.

Abstract

We explore the business-cycle implications of agency problems between firms and financiers. We show how these problems create liquidity shortages that can lead to corporate bankruptcy, and may generate aggregate, endogenous cycles in an economy that otherwise would have had a unique, stationary equilibrium. Some new results about the dynamics of credit rationing are derived. We argue that the modeled effect is quantitatively significant. Our model provides new insights into the role of institutions, such as bankruptcy law, in business-cycle theory.

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Bibliographic Info

Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9722.

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Length: 40 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:fth:cemfdt:9722

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Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Phone: 914290551
Fax: 914291056
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Web page: http://www.cemfi.es/
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Related research

Keywords: BUSINESS CYCLES ; BUSINESS FINANCING ; CREDIT ; ECONOMIC MODELS;

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Cited by:
  1. Scott, A. & Uhlig, H.F.H.V.S., 1998. "Fickle Investors: An Impediment to Growth?," Discussion Paper 1998-134, Tilburg University, Center for Economic Research.
  2. Nasha Ananchotikul & Nuwat Nookhwun & Paiboon Pongpaichet & Songklod Rastapana & Phurichai Rungcharoenkitkul, 2010. "The Future of Monetary Policy: Roles of Financial Stability and Exchange Rate," Working Papers 2010-07, Economic Research Department, Bank of Thailand.

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