Credit Market and Macroeconomic Volatility

49 Pages Posted: 11 Apr 2007

See all articles by Caterina Mendicino

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Date Written: March 2007

Abstract

This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data.

Keywords: credit frictions, reallocation of capital, asset prices

JEL Classification: E21, E22, E44, G20

Suggested Citation

Mendicino, Caterina, Credit Market and Macroeconomic Volatility (March 2007). ECB Working Paper No. 743. Available at SSRN: https://ssrn.com/abstract=975681

Caterina Mendicino (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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