A Behavioral Model of the Credit Cycle

46 Pages Posted: 7 Nov 2018

See all articles by Barbara Annicchiarico

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance; University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS)

Silvia Surricchio

University of Rome Tor Vergata - Department of Economics and Finance

Robert Waldmann

Universita di Roma Tor Vergata; National Bureau of Economic Research (NBER)

Date Written: October 30, 2018

Abstract

In a behavioral variant of a New Keynesian model, in which individuals use simple heuristic rules to forecast future inflation and output gap, if there are limits on the amount of debt that economic agents are allowed to bear, we observe occasionally severe downturns. Differences in beliefs combined with borrowing constraints tend to dampen expansions, but give rise to a chain reaction that exacerbates the recessions. The model is an example of endogenous credit cycles with expansions, severe recessions, and persistent inequality in the distribution of wealth. Monetary policy can both stabilize the economy and cause increased average output.

Keywords: Credit cycle, heuristic rules, monetary policy

JEL Classification: E10, E32, D83.

Suggested Citation

Annicchiarico, Barbara and Surricchio, Silvia and Waldmann, Robert, A Behavioral Model of the Credit Cycle (October 30, 2018). CEIS Working Paper No. 446. Available at SSRN: https://ssrn.com/abstract=3275525 or http://dx.doi.org/10.2139/ssrn.3275525

Barbara Annicchiarico (Contact Author)

University of Rome, Tor Vergata - Department of Economics and Finance ( email )

Rome, I-00133
Italy

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
Italy

Silvia Surricchio

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Via columbia 2
Rome, Rome 00123
Italy

Robert Waldmann

Universita di Roma Tor Vergata ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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