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A Stylized Model of Financially-Driven Business Cycles

Author

Listed:
  • Suarez, J.
  • Sussman, O.

Abstract

We explore the business-cycle implications of agency problems between firms and financiers. We show how these problems create liquidity shortages that can lead to corporate bankruptcy, and may generate aggregate, endogenous cycles in an economy that otherwise would have had a unique, stationary equilibrium. Some new results about the dynamics of credit rationing are derived. We argue that the modeled effect is quantitatively significant. Our model provides new insights into the role of institutions, such as bankruptcy law, in business-cycle theory.

Suggested Citation

  • Suarez, J. & Sussman, O., 1997. "A Stylized Model of Financially-Driven Business Cycles," Papers 9722, Centro de Estudios Monetarios Y Financieros-.
  • Handle: RePEc:fth:cemfdt:9722
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    Cited by:

    1. Scott, Andrew & Uhlig, Harald, 1999. "Fickle investors: An impediment to growth?," European Economic Review, Elsevier, vol. 43(7), pages 1345-1370, June.
    2. Nasha Ananchotikul & Nuwat Nookhwun & Paiboon Pongpaichet & Songklod Rastapana & Phurichai Rungcharoenkitkul, 2010. "The Future of Monetary Policy: Roles of Financial Stability and Exchange Rate," Working Papers 2010-07, Monetary Policy Group, Bank of Thailand.

    More about this item

    Keywords

    BUSINESS CYCLES ; BUSINESS FINANCING ; CREDIT ; ECONOMIC MODELS;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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