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Optimal Credit Cycles

Author

Listed:
  • Zachary Bethune

    (University of Virginia)

  • Tai-Wei Hu

    (Northwestern University)

  • Guillaume Rocheteau

    (University of California, Irvine)

Abstract

Under which conditions are extrinsic credit fluctuations socially optimal? In order to answer this question we characterize constrained-efficient allocations in an infinite horizon, two-good economy with limited commitment for two market structures, random pairwise meetings and centralized meetings. If agents meet bilaterally, then constrained-efficient allocations specify the highest stationary output level that is incentive feasible, and it is implemented with take-it-or-leave-it offers and "not-too-tight" solvency constraints. If agents meet in a centralized location, constrained-efficient allocations can be non-stationary, in which case they feature a credit boom followed by stagnation due to "too-tight" solvency constraints. We also characterize constrained-efficient allocations under partial commitment by the planner. If commitment is low, the economy experiences rare but pronounced credit crunches. If commitment is high, the economy experiences infrequent but large credit booms. (Copyright: Elsevier)

Suggested Citation

  • Zachary Bethune & Tai-Wei Hu & Guillaume Rocheteau, 2018. "Optimal Credit Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 231-245, January.
    • Handle: RePEc:red:issued:17-63
    DOI: 10.1016/j.red.2017.07.004
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    Cited by:

    1. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    Credit cycles; Limired commitment; Money;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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