Equilibrium Lending Mechanism and Aggregate Activity

21 Pages Posted: 10 Aug 2010

See all articles by Cheng Wang

Cheng Wang

University of Iowa

Ruilin Zhou

Penn State University

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Abstract

We construct a model of the credit market where financial contracting is subject to costly state verification and moral hazard. The economy's aggregate activity and its equilibrium lending mechanism are determined jointly. We analyze how changes in the model's exogenous variables, including the returns of the economy's investment projects and the supply of loans, affect the economy's aggregate output and the types of the credit through which investment is funded.

Suggested Citation

Wang, Cheng and Zhou, Ruilin, Equilibrium Lending Mechanism and Aggregate Activity. International Economic Review, Vol. 51, Issue 3, pp. 631-651, August 2010. Available at SSRN: https://ssrn.com/abstract=1654632 or http://dx.doi.org/10.1111/j.1468-2354.2010.00595.x

Cheng Wang

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

Ruilin Zhou

Penn State University ( email )

524 Kern Graduate Building
Department of Economics
University Park, PA 16802
United States

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