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Changing Credit Limits, Changing Business Cycles

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  • Jensen, Henrik
  • Ravn, Søren Hove
  • Santoro, Emiliano

Abstract

In the last decades, capital markets across the industrialized world have undergone massive deregulation, involving increases in the loan-to-value (LTV) ratios of households and firms. We study the business-cycle implications of this phenomenon in a dynamic general equilibrium model with multiple credit-constrained agents. Starting from low LTV ratios, a progressive relaxation of credit constraints leads to both higher macroeconomic volatility and stronger comovement between debt and real variables. This pattern reverses at LTV ratios not far from those currently observed in many advanced economies, since credit constraints become non-binding more often. As expansionary shocks may make credit constraints non-binding, while contractionary shocks cannot, recessions become deeper than expansions. The non-monotonic relationship between credit market conditions and macroeconomic fluctuations poses a serious challenge for regulatory and macroprudential policies.

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  • Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2015. "Changing Credit Limits, Changing Business Cycles," CEPR Discussion Papers 10462, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10462
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    Cited by:

    1. Ravn, Søren Hove, 2016. "Endogenous credit standards and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 89-111.
    2. Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2016. "Deepening Contractions and Collateral Constraints," CEPR Discussion Papers 11166, C.E.P.R. Discussion Papers.
    3. repec:eee:jmacro:v:59:y:2019:i:c:p:299-324 is not listed on IDEAS

    More about this item

    Keywords

    business cycles; capital-market liberalization; capital-market regulation; occasionally non-binding contract constraints;

    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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