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Credit Market Development, Asset Prices and Business Cycle

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  • Caterina Mendicino

    (Stockholm School of Economics)

Abstract

This paper studies the role of credit market development in an economy with credit frictions. I examine how the provision of credit in connection with collateral assets affects economic performance and the business cycle. In the framework of an economy in which credit constraints arise because borrowers cannot force lenders to repay, I show that, as expected, facilitating collateralized debt financing implies an increase in e¢ ciency in terms of production. Moreover, I also show how the rise in collateral/asset prices is a direct consequence of credit market development. Last, but most intriguing I demonstrate that, to a certain extent, a stronger impact of shocks is associated with a higher degree of access to the credit market. Economies at an intermediate level of credit market development are more vulnerable to shocks

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 74.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:74

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  17. Sebastian Barnes & Garry Young, 2003. "The rise in US household debt: assessing its causes and sustainability," Bank of England working papers 206, Bank of England.
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