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Endogenous Credit Cycles

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Author Info
Alberto Martin ()

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Abstract

I develop an overlapping-generations framework in which changes in lending standards generate endogenous cycles. In my economy, entrepreneurs who are privately informed about the quality of their projects need to borrow funds. Intermediaries screen entrepreneurs both through the amount of investment undertaken and through the level of entrepreneurial net worth. I show that endogenous regime switches in financial contracts —from pooling to separating and vice-versa— may generate fluctuations even in the absence of exogenous shocks. When the economy is in the pooling (separating) regime, lending standards seem “lax” (“tight”) and investment is high (low). Differently from the existing literature, my model does not require entrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregate investment.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 916.

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Date of creation: Nov 2004
Date of revision: Aug 2008
Handle: RePEc:upf:upfgen:916

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Endogenous cycles; financial accelerator; adverse selection; pooling equilibrium; separating equilibrium;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Suarez, Javier & Sussman, Oren, 1997. "Endogenous Cycles in a Stiglitz-Weiss Economy," CEPR Discussion Papers 1604, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Reichlin, Pietro & Siconolfi, Paolo, 2000. "Optimal Debt Contracts and Moral Hazard Along the Business Cycle," CEPR Discussion Papers 2351, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Francis Longstaff & Monika Piazzesi, 2003. "Corporate Earnings and the Equity Premium," NBER Working Papers 10054, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. Kenneth Rogoff & M. Ayhan Kose & Eswar Prasad & Shang-Jin Wei, 2004. "Effects on Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  6. Pietro Reichlin, 1997. "Endogenous Cycles in Competitive Models: An Overview," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 1(4). [Downloadable!]
  7. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325. [Downloadable!] (restricted)
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  8. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  9. Alberto Martin, 2003. "On Rothschild-Stiglitz as Competitive Pooling," Economics Working Papers 917, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2006. [Downloadable!]
    Other versions:
  10. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  12. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: challenges for macroeconomics and policy," Discussion Papers 27, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
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