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Credit and Business Cycles

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  • Nobuhiro Kiyotaki

Abstract

This paper presents two dynamic models of the economy in which credit constraints arise because creditors cannot force debtors to repay debts unless the debts are secured by collateral. The credit system becomes a powerful propagation mechanism by which the effects of shocks persist and amplify through the interaction between collateral values, borrowers' net worth and credit limits. In particular, when fixed assets serve as collateral, I show that relatively small, temporary shocks to technology or wealth distribution can generate large, persistent fluctuations in output and asset prices. JEL Classification Numbers: E32, E44

Suggested Citation

  • Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, March.
    • Handle: RePEc:bla:jecrev:v:49:y:1998:i:1:p:18-35
    DOI: 10.1111/1468-5876.00069
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    More about this item

    JEL classification:

    • 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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