Rolled-over Credit Cycles

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See all articles by Haozhou Tang

Haozhou Tang

Dongbei University of Finance and Economics

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn

Date Written: November 24, 2022

Abstract

Canonical macroeconomic and financial models require credit to be equal to its fundamental component, i.e., the net present value of the net flows to creditors. Per this conventional view, credit booms are expected to precede increased flows to creditors. However, data suggests otherwise. To rationalize the novel empirical findings, we develop a model with financial frictions and heterogeneous firms, allowing firms to roll over a fraction of credits indefinitely, i.e., credit bubbles exist. We show that a positive credit bubble shock raises the aggregate credit and output while depressing the credit’s fundamental component through firms’ precautionary savings.

Keywords: Rational Bubbles, Heterogeneous Firms, Financial Frictions

JEL Classification: D92, E32, E44

Suggested Citation

Tang, Haozhou and Zhang, Donghai, Rolled-over Credit Cycles (November 24, 2022). Available at SSRN: https://ssrn.com/abstract=

Haozhou Tang

Dongbei University of Finance and Economics ( email )

Dalian
China

Donghai Zhang (Contact Author)

Institute for Macroeconomics and Econometrics - University of Bonn ( email )

Bonn
Germany

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