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Expectation Errors In Credit Market And Business Cycles

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  • Tamegawa, Kenichi
  • Fukuda, Shin

Abstract

This study demonstrates how expectation errors in a credit market generate economic fluctuations. To this end, we employ simulation analysis using a dynamic stochastic general equilibrium model. Our model includes two building blocks that are not included in the standard models: the banking sector and matching friction in the labor market. By introducing the banking sector, we can confirm that if economic agents fallaciously expect a rise in future asset prices, such expectations will cause an economic boom and bust. The variation of this fluctuation is quite large and the recession short-lived, but these drawbacks can be avoided by adding matching friction.

Suggested Citation

  • Tamegawa, Kenichi & Fukuda, Shin, 2016. "Expectation Errors In Credit Market And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 20(5), pages 1359-1380, July.
    • Handle: RePEc:cup:macdyn:v:20:y:2016:i:05:p:1359-1380_00
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