Rolled-over Credit Cycles
68 Pages Posted:
Date Written: November 24, 2022
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: Suggested Citation