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Endogenous Cycles in a Stiglitz-Weiss Economy

Suarez, Javier and Sussman, Oren (2004) Endogenous Cycles in a Stiglitz-Weiss Economy. In: Bhattacharya, Sudipto, Boot, Arnoud and Thakor, Anjan V., (eds.) Credit, Intermediation, and the Macroeconomy: Readings and Perspectives in Modern Financial Theory. Oxford University Press, pp. 833-855. ISBN 978-0199243068

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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: Book Section
Keywords: Credit Rationing; Endogenous Cycles; Business Cycles; finance
Subject(s): Finance
Date Deposited: 22 Mar 2013 16:18
Last Modified: 02 Mar 2017 14:39
Funders: N/A

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