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Endogenous Cycles in a Stiglitz-Weiss Economy

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.

Item Type: Article
Keywords: Credit Rationing; Endogenous Cycles; Business Cycles; finance
Subject(s): Finance
Date Deposited: 19 Feb 2012 11:35
Last Modified: 02 Mar 2017 14:38
Funders: N/A

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