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Credit Market Development, Asset Prices and Business Cycle

  • Caterina Mendicino

    ()

    (Stockholm School of Economics public)

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

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 120.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:120
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  1. Leslie Hull, 2003. "Financial deregulation and household indebtedness," Reserve Bank of New Zealand Discussion Paper Series DP2003/01, Reserve Bank of New Zealand.
  2. Cordoba, Juan Carlos & Ripoll, Marla, 2010. "Credit Cycles Redux," Staff General Research Papers 32122, Iowa State University, Department of Economics.
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  3. Oriana Bandiera & Gerard Caprio Jr. & Patrick Honohan & Fabio Schiantarelli, 1998. "Does Financial Reform Raise or Reduce Savings?," Boston College Working Papers in Economics 413, Boston College Department of Economics.
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  8. Tullio Jappelli & Marco Pagano, 1998. "The Determinants of Savings: Lessons from Italy," CSEF Working Papers 01, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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  10. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
  11. Peek, Joe & Rosengren, Eric S & Tootell, Geoffrey M B, 2003. " Identifying the Macroeconomic Effect of Loan Supply Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 931-46, December.
  12. 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.
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  14. Einarsson, Tor & Marquis, Milton H, 2001. "Bank Intermediation over the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 876-99, November.
  15. Sebastian Barnes & Garry Young, 2003. "The rise in US household debt: assessing its causes and sustainability," Bank of England working papers 206, Bank of England.
  16. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  17. Borja Larrain, 2004. "Financial development, financial constraints, and the volatility of industrial output," Public Policy Discussion Paper 04-6, Federal Reserve Bank of Boston.
  18. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  19. Hansen, Jan, 2003. "Financial Cycles and Bankruptcies in the Nordic Countries," Working Paper Series 149, Sveriges Riksbank (Central Bank of Sweden).
  20. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "Houses as collateral: has the link between house prices and consumption in the U.K. changed?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 163-177.
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