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Credit Market Development, Asset Prices and Business Cycle

Author

Listed:
  • Caterina Mendicino

    (Stockholm School of Economics public)

Abstract

This paper studies the role of credit market development in an economy with credit frictions. I examine how the provision of credit in connection with collateral assets affects economic performance and the business cycle. In the framework of an economy in which credit constraints arise because borrowers cannot force lenders to repay, I show that, as expected, facilitating collateralized debt financing implies an increase in e¢ ciency in terms of production. Moreover, I also show how the rise in collateral/asset prices is a direct consequence of credit market development. Last, but most intriguing I demonstrate that, to a certain extent, a stronger impact of shocks is associated with a higher degree of access to the credit market. Economies at an intermediate level of credit market development are more vulnerable to shocks

Suggested Citation

  • Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Computing in Economics and Finance 2005 120, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:120
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • 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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