Credit Search and Credit Cycles

31 Pages Posted: 6 Oct 2015 Last revised: 6 Mar 2019

See all articles by Feng Dong

Feng Dong

Tsinghua University - School of Economics and Management

Pengfei Wang

Peking University HSBC Business School

Yi Wen

Federal Reserve Bank of St. Louis - Research Department; Tsinghua University

Date Written: 2015-08-01

Abstract

The supply and demand of credit are not always well aligned and matched, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate. We develop a search-based theory of credit allocations to explain the cyclical fluctuations in both bank reserves and the interest spread. We show that search frictions in the credit market can not only naturally explain the countercyclical bank reserves and interest spread, but also generate endogenous business cycles driven primarily by the cyclical utilization rate of credit resources, as long conjectured by the Austrian school of the business cycle. In particular, we show that credit search can lead to endogenous local increasing returns to scale and variable capital utilization in a model with constant returns to scale production technology and matching functions, thus providing a micro-foundation for the indeterminacy literature of Benhabib and Farmer (1994) and Wen (1998).

Keywords: Search Frictions, Credit Utilization, Credit Rationing, Self-fulfilling Prophecy. Business Cycles.

JEL Classification: E1, E2, E3, E4

Suggested Citation

Dong, Feng and Wang, Pengfei and Wen, Yi, Credit Search and Credit Cycles (2015-08-01). FRB St. Louis Working Paper No. 2015-23, Available at SSRN: https://ssrn.com/abstract=2669855

Feng Dong (Contact Author)

Tsinghua University - School of Economics and Management ( email )

School of Economics and Management
Tsinghua University
Beijing, Beijing 100084
China

HOME PAGE: http://fengdongecon.weebly.com

Pengfei Wang

Peking University HSBC Business School ( email )

Yi Wen

Federal Reserve Bank of St. Louis - Research Department ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8559 (Phone)
314-444-8731 (Fax)

Tsinghua University ( email )

Beijing, 100084
China

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