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Credit Market Development, Asset Prices and Business Cycle

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  • Caterina Mendicino

    ()
    (Stockholm School of Economics public)

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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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 120.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:120

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Keywords: Credit Market Development; Credit Frictions; Heteroge-;

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  1. Juan-Carlos Cordoba & Marla Ripoll, 2004. "Credit Cycles Redux," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1011-1046, November.
  2. Jan Vlieghe, 2004. "Imperfect credit markets and the transmission of macroeconomic shocks," Money Macro and Finance (MMF) Research Group Conference 2004 17, Money Macro and Finance Research Group.
  3. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 2000. "Identifying the macroeconomic effect of loan supply shocks," Working Papers 00-2, Federal Reserve Bank of Boston.
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  5. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "Houses as collateral: has the link between house prices and consumption in the U.K. changed?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 163-177.
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  12. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  13. Leslie Hull, 2003. "Financial deregulation and household indebtedness," Reserve Bank of New Zealand Discussion Paper Series DP2003/01, Reserve Bank of New Zealand.
  14. Borja Larrain, 2004. "Financial development, financial constraints, and the volatility of industrial output," Public Policy Discussion Paper 04-6, Federal Reserve Bank of Boston.
  15. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
  16. 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.
  17. Einarsson, Tor & Marquis, Milton H, 2001. "Bank Intermediation over the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 876-99, November.
  18. Ben S. Bernanke, 1981. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," NBER Working Papers 0756, National Bureau of Economic Research, Inc.
  19. 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.
  20. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
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