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Credit Traps and Credit Cycles

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  • Kiminori Matsuyama

Abstract

We develop a simple macroeconomic model of credit market imperfections with heterogeneous investment projects. The projects differ in productivity, the investment requirement, and the severity of agency problems behind the borrowing constraints. A movement in borrower net worth shifts the composition of the credit between projects with different productivity levels, thereby causing endogenous investment-specific technological change. Furthermore, such endogenous technological change in turn affects borrower net worth. These composition effects could give rise to credit traps, credit collapse, leapfrogging, credit cycles, and growth miracles in the dynamics of the aggregate investment and borrower net worth. (JEL E22, E44, O33)

Suggested Citation

  • Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    • Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:503-516
    DOI: 10.1257/aer.97.1.503
    Note: DOI: 10.1257/aer.97.1.503
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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