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Creating business cycles through credit constraints

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  • Narayana R. Kocherlakota

Abstract

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).

Suggested Citation

  • Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Sum), pages 2-10.
  • Handle: RePEc:fip:fedmqr:y:2000:i:sum:p:2-10:n:v.24no.1
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    References listed on IDEAS

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    3. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    4. Falk, Barry, 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1096-1109, October.
    5. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, March.
    6. de Oliveira Sotomayor, Marilda A., 1984. "On income fluctuations and capital gains," Journal of Economic Theory, Elsevier, vol. 32(1), pages 14-35, February.
    7. 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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