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Credit disruptions and the spillover effects between the household and business sectors

  • Nilavongse, Rachatar
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    This paper studies the effects of credit supply disruptions in a dynamic stochastic general equilibrium (DSGE) framework. First, this paper examines the effects of credit supply disruptions in the business sector. The model with financially constrained households generates a bigger decline in aggregate consumption and GDP than the model without financially constrained households. The reason is that the spillover effect from the business sector to the household sector occurs through a labor income channel. With financially constrained households in the model, a collateral channel strengthens the spillover effects and amplifies business cycles. Then this paper examines the effects of credit supply disruptions in the household sector. A tightening of household credit conditions causes a substantial drop in aggregate consumption, which pushes inflation downward. Debt deflation further depresses consumption, labor demand, and investment, altogether generating a sharp decline in GDP.

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    File URL: http://www.economics-ejournal.org/economics/discussionpapers/2013-48
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    Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2013-48.

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    Date of creation: 2013
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    Handle: RePEc:zbw:ifwedp:201348
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    1. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
    2. pengfei Wang & Tao Zha & Zheng Liu, 2012. "Land-Price Dynamics and Macroeconomic Fluctuations," 2012 Meeting Papers 85, Society for Economic Dynamics.
    3. Finocchiaro, Daria & Queijo von Heideken, Virginia, 2007. "Do Central Banks React to House Prices?," Working Paper Series 217, Sveriges Riksbank (Central Bank of Sweden), revised 01 Aug 2009.
    4. Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago.
    5. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
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