We develop a framework in which change in lending standards generate endogenous cycles. In particular, we study an environment in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. We show how endogenous regime switches in financial contracts - from pooling to separating and vice-versa - may generate fluctuations in an economy that exhibits no dynamics under full information. When our economy is in the pooling (separating) regime, lending standards seem "lax" ("tight"), rates of collateralization are low (high) and investment is high (low). Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment.
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
916.
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.:
Kiyotaki, Nobuhiro & Moore, John, 1997.
"Credit Cycles,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 211-48, April.
Other versions:
Nobuhiro Kiyotaki & John Moore, 1995.
"Credit Cycles,"
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
John Moore & Nobuhiro Kiyotaki, .
"Credit Cycles,"
Discussion Papers
1995-5, Edinburgh School of Economics, University of Edinburgh.