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Credit Cycles

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  • Nobuhiro Kiyotaki
  • John Moore

Abstract

This paper is a theoretical study into how credit constraints interact with aggregate economic activity over the business cycle. We construct a model of a dynamic economy in which lenders cannot force borrowers to repay their debts unless the debts are secured. In such an economy, durable assets such as land, buildings and machinery play a dual role: they are not only factors of production, but they also serve as collateral for loans. Borrowers' credit limits are affected by the prices of the collateralized assets. And at the same time, these prices are affected by the size of the credit limits. The dynamic interaction between credit limits and asset prices turns out to be a powerful transmission mechanism by which the effects of shocks persist, amplify, and spill over to other sectors. We show that small, temporary shocks to technology or income distribution can generate large, persistent fluctuations in output and asset prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5083.

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Date of creation: Apr 1995
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Publication status: published as Kiyotaki, Nobuhiro and John Moore. "Credit Cycles," Journal of Political Economy, 1997, v105(2,Apr), 211-248.
Handle: RePEc:nbr:nberwo:5083

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  1. Hart, O. & Moore, J., 1991. "A Theory of Debt Based on the Inalienability of Human Capital," Working papers 592, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," STICERD - Theoretical Economics Paper Series /1997/321, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  4. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
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  1. Sunspots and Credit Frictions
    by Christian Zimmermann in NEP-DGE blog on 2010-01-25 03:20:38
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