Self-Fulfilling Credit Cycles

FRB of St. Louis Working Paper No. 2012-047A

30 Pages Posted: 24 Oct 2012

See all articles by Costas Azariadis

Costas Azariadis

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Leo Kaas

University of Konstanz - Faculty of Economics and Statistics; IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 20, 2012

Abstract

This paper argues that self-fulfilling beliefs in credit conditions can generate endogenously persistent business cycle dynamics. We develop a tractable dynamic general equilibrium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complementarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.

Keywords: Limited enforcement, Credit cycles, Sunspots

JEL Classification: D92, E32, O40

Suggested Citation

Azariadis, Costas and Kaas, Leo, Self-Fulfilling Credit Cycles (August 20, 2012). FRB of St. Louis Working Paper No. 2012-047A. Available at SSRN: https://ssrn.com/abstract=2166087 or http://dx.doi.org/10.2139/ssrn.2166087

Costas Azariadis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Leo Kaas

University of Konstanz - Faculty of Economics and Statistics ( email )

Universitaetsstr. 10
78457 Konstanz
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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