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A Stylized Model of Financially-Driven Business Cycles


  • Suarez, J.
  • Sussman, O.


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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    References listed on IDEAS

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    4. Sueyoshi, Glenn T, 1995. "A Class of Binary Response Models for Grouped Duration Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 411-431, Oct.-Dec..
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    6. Olivier Jean Blanchard & Peter Diamond, 1994. "Ranking, Unemployment Duration, and Wages," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 417-434.
    7. Katz, Lawrence F. & Meyer, Bruce D., 1990. "The impact of the potential duration of unemployment benefits on the duration of unemployment," Journal of Public Economics, Elsevier, vol. 41(1), pages 45-72, February.
    8. Alfonso Alba-Ramirez & Richard B. Freeman, 1990. "Jobfinding and Wages when Longrun Unemployment is Really Long: The Case of Spain," NBER Working Papers 3409, National Bureau of Economic Research, Inc.
    9. Ham, John C & LaLonde, Robert J, 1996. "The Effect of Sample Selection and Initial Conditions in Duration Models: Evidence from Experimental Data on Training," Econometrica, Econometric Society, vol. 64(1), pages 175-205, January.
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    11. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
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    13. Narendranathan, W & Stewart, Mark B, 1993. "How Does the Benefit Effect Vary as Unemployment Spells Lengthen?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 361-381, Oct.-Dec..
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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.

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    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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