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Creating business cycles through credit constraints

  • Narayana R. Kocherlakota

Business cycles appear to be large, persistent, and asymmetric relative to the shocks hitting the economy. This observation suggests the existence of an asymmetric amplification and propagation mechanism, which transforms the shocks into the observed movements in aggregate output. This article demonstrates, in a small open economy, how credit constraints can be such a mechanism. The article also shows, however, that the quantitative significance of the amplification which credit constraints can provide is sensitive to the quantitative specification of the underlying economy (especially factor shares).

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2000)
Issue (Month): Sum ()
Pages: 2-10

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Handle: RePEc:fip:fedmqr:y:2000:i:sum:p:2-10:n:v.24no.1
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  1. Kocherlakota, Narayana R., 1996. "Consumption, commitment, and cycles," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 461-474, June.
  2. Falk, Barry L., 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Staff General Research Papers 11097, Iowa State University, Department of Economics.
  3. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  4. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
  5. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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