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Self-Fulfilling Credit Cycles

Author

Listed:
  • Costas Azariadis

    (Washington University, Department of Economics, USA)

  • Leo Kaas

    (University of Konstanz, Department Economics, Germany)

Abstract

This paper argues that self-fulfilling beliefs in credit conditions can generate endogenously persistent business cycle dynamics. We develop a tractable dynamic general equilibrium model with idiosyncratic firm productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complementarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.

Suggested Citation

  • Costas Azariadis & Leo Kaas, 2012. "Self-Fulfilling Credit Cycles," Working Paper Series of the Department of Economics, University of Konstanz 2012-16, Department of Economics, University of Konstanz.
    • Handle: RePEc:knz:dpteco:1216
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    More about this item

    Keywords

    Limited enforcement; Credit cycles; Sunspots;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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