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Credit Market and Macroeconomic Volatility

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  • Caterina Mendicino

    () (Department of Economics Stockholm School of Economics)

Abstract

This paper investigate how the degree of credit market development is related to business cycle fluctuations in industrialized countries. I show that a business cycle model with collateral constraints generate a negative relation between the volatility of the cyclical component of output and the size of the credit market. I dentify the reallocation of capital as the key element in shaping out this relation. According to the model, more credit to the private sector makes output less sensitive to productivity shocks. Thus, the amplification role of credit frictions in the propagation of productivity shocks to output is greater in economies with higher degrees of credit rationing. I confront the prediction of the model with a panel of OECD countries over the last 20 years. Empirical evidence confirms that countries with a more developed credit market experience smoother fluctuations. Moreover, a greater size of the credit market dampens the propagation of productivity shocks to output and investment

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  • Caterina Mendicino, 2006. "Credit Market and Macroeconomic Volatility," 2006 Meeting Papers 317, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:317
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    Cited by:

    1. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2017. "Expectations-driven cycles in the housing market," Economic Modelling, Elsevier, vol. 60(C), pages 297-312.
    2. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
    3. Gábor Vadas, 2007. "Wealth portfolio of Hungarian households – Urban legends and facts," MNB Occasional Papers 2007/68, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Balázs Zsámboki, 2007. "Basel II and financial stability: An investigation of sensitivity and cyclicality of capital requirements based on QIS 5," MNB Occasional Papers 2007/67, Magyar Nemzeti Bank (Central Bank of Hungary).
    5. Bezemer, Dirk J, 2009. "Banks As Social Accountants: Credit and Crisis Through an Accounting Lens," MPRA Paper 15766, University Library of Munich, Germany.
    6. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2006. "Financial innovation and the Great Moderation: what do household data say?," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    7. Conroy, Niall, 2015. "Irish Quarterly Macroeconomic Data: A Volatility Analysis," Research Notes RN2015/2/1, Economic and Social Research Institute (ESRI).

    More about this item

    Keywords

    collateral constraint; reallocation of capital; asset prices;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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