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Endogenous Cycles in a Stiglitz-Weiss Economy

  • Suarez, Javier
  • Sussman, Oren

The literature on financial imperfections and business cycles has focused on propagation mechanisms. In this paper we model a pure reversion mechanism, such that the economy may converge to a two-period equilibrium cycle. This mechanism confirms that financial imperfections may have a dramatic amplification effect. Unlike some related models, contracts are complete. Indexation is not assumed away. The welfare properties of a possible stabilizing policy are analysed. The model itself is a dynamic extension of the well-known Stiglitz-Weiss model of lending under moral hazard. Although stylized, the model still captures some important features of credit cycles.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022-0531(97)92297-3
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 76 (1997)
Issue (Month): 1 (September)
Pages: 47-71

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Handle: RePEc:eee:jetheo:v:76:y:1997:i:1:p:47-71
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  9. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
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  14. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
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