Credit disruptions and the spillover effects between the household and business sectors
AbstractThis paper studies the effects of credit supply disruptions in a dynamic stochastic general equilibrium (DSGE) framework. First, this paper examines the effects of credit supply disruptions in the business sector. The model with financially constrained households generates a bigger decline in aggregate consumption and GDP than the model without financially constrained households. The reason is that the spillover effect from the business sector to the household sector occurs through a labor income channel. With financially constrained households in the model, a collateral channel strengthens the spillover effects and amplifies business cycles. Then this paper examines the effects of credit supply disruptions in the household sector. A tightening of household credit conditions causes a substantial drop in aggregate consumption, which pushes inflation downward. Debt deflation further depresses consumption, labor demand, and investment, altogether generating a sharp decline in GDP. --
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2013-48.
Date of creation: 2013
Date of revision:
financially constrained households; entrepreneurs; credit conditions; spillover effects; housing prices; collateral value;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- 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
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-26 (All new papers)
- NEP-DGE-2013-09-26 (Dynamic General Equilibrium)
- NEP-MAC-2013-09-26 (Macroeconomics)
- NEP-URE-2013-09-26 (Urban & Real Estate Economics)
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