Good and Bad Investment: An Inquiry into the Causes of Credit Cycles
This paper develops models of endogenous credit cycles. The basic model has two types of profitable investment projects: the Good and the Bad. Unlike the Good, the Bad contributes little to improve the net worth of other borrowers. Furthermore, it is relatively difficult to finance externally due to the agency problem. In a recession, a low net worth prevents the agents from financing the Bad, and much of the saving goes to finance the Good. This leads an improvement in net worth. In a boom, a high net worth makes it possible for the agents to finance the Bad. At the peak of the boom, this shift in the composition of credit and of investment from the Good to the Bad causes a deterioration of net worth, and the economy plunges into a recession. The whole process repeats itself. Endogenous fluctuations occur because the Good breeds the Bad, and the Bad destroys the Good. When extended to incorporate the Bernanke-Gertler (1989) type credit multiplier mechanism, the model generates asymmetric fluctuations, along which the economy experiences a long and slow process of recovery from a recession, followed by a rapid expansion, and possibly after a period of high volatility, plunges into a recession.
(This abstract was borrowed from another version of this item.)
|Date of creation:||Jan 2001|
|Date of revision:||Sep 2001|
|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1997.
"Dualism and macroeconomic volatility,"
CEPREMAP Working Papers (Couverture Orange)
- Matsuyama, Kiminori, 1996.
"Growing Through Cycles,"
40, Institute for Advanced Studies.
- Matsuyama, Kiminori, 2001.
"Growing through Cycles in an Infinitely Lived Agent Economy,"
Journal of Economic Theory,
Elsevier, vol. 100(2), pages 220-234, October.
- Kiminori Matsuyama, 1999. "Growing Through Cycles in an Infinitely -lived Agent Economy," Discussion Papers 1280, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Boldrin, Michele & Woodford, Michael, 1990.
"Equilibrium models displaying endogenous fluctuations and chaos : A survey,"
Journal of Monetary Economics,
Elsevier, vol. 25(2), pages 189-222, March.
- Michele Boldrin & Michael Woodford, 1988. "Equilibruim Models Displaying Endogenous Fluctuations and Chaos: A Survey," UCLA Economics Working Papers 530, UCLA Department of Economics.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Baumol, William J. & Benhabib, Jess, 1987.
"Chaos: Significance, Mechanism, and Economic Applications,"
87-16, C.V. Starr Center for Applied Economics, New York University.
- Baumol, William J & Benhabib, Jess, 1989. "Chaos: Significance, Mechanism, and Economic Applications," Journal of Economic Perspectives, American Economic Association, vol. 3(1), pages 77-105, Winter.
- Kiminori Matsuyama, 2000.
Review of Economic Studies,
Oxford University Press, vol. 67(4), pages 743-759.
- Kiminori Matsuyama, 2001.
"Financial Market Globalization and Endogenous Inequality of Nations,"
1334, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kiminori Matsuyama, 2000. "Financial Market Globalization and Endogenous Inequality of Nations," Discussion Papers 1300, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1335. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker)
If references are entirely missing, you can add them using this form.