Suarez, Javier and Sussman, Oren (1997) Endogenous Cycles in a Stiglitz-Weiss Economy. Journal of Economic Theory, 76 (1). pp. 47-71.
The literature on financial imperfections and business cycles has focused onpropagation mechanisms. In this paper we model a purereversion mechanism, such that the economy may converge to a two-period equilibrium cycle. This mechanism confirms that financial imperfections may have a dramatic amplification effect. Unlike in some related models, contracts are complete. Indexation is not assumed away. The welfare properties of a possible stabilizing policy are analyzed. The model itself is a dynamic extension of the well-known Stiglitz-Weiss model of lending under moral hazard. Although stylized the model still captures some important features of credit cycles.
|Keywords:||Credit Rationing; Endogenous Cycles; Business Cycles|
|Centre:||Faculty of Finance|
|Date Deposited:||19 Feb 2012 11:35|
|Last Modified:||23 Oct 2015 14:07|
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