Endogenous Credit Cycles
AbstractWe build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the timing mismatch is driven by a real shock (i.e., preference shock).
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Bibliographic InfoPaper provided by Department of Economics, University of Missouri in its series Working Papers with number 1114.
Length: 28 pgs.
Date of creation: 22 Sep 2011
Date of revision:
liquidity problem; timing mismatch; leveraging; liquidity shock; settlement risk; repurchase agreement; consumption shock;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
- NEP-BAN-2011-10-01 (Banking)
- NEP-CBA-2011-10-01 (Central Banking)
- NEP-MAC-2011-10-01 (Macroeconomics)
- NEP-MON-2011-10-01 (Monetary Economics)
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