Self-Fulfilling Credit Cycles

Azariadis, Costas; Kaas, Leo; Wen, Yi

Self-Fulfilling Credit Cycles

Files

Azariadis_0-374573.pdf(1.08 MB)

Date

2016

Authors

Azariadis, Costas

Kaas, Leo

Wen, Yi

Publication type

Journal article

Publication status

Published

Published in

The Review of Economic Studies ; 83 (2016), 4. - pp. 1364-1405. - ISSN 0034-6527. - eISSN 1467-937X

Abstract

In U.S. data 1981–2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this article, we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business-cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity, and output. We show that these sunspot shocks are quantitatively important, accounting for around half of output volatility.

Subject (DDC)

330 Economics

Keywords

Unsecured firm credit; Credit cycles; Sunspots

Cite This

ISO 690

AZARIADIS, Costas, Leo KAAS, Yi WEN, 2016. Self-Fulfilling Credit Cycles. In: The Review of Economic Studies. 83(4), pp. 1364-1405. ISSN 0034-6527. eISSN 1467-937X. Available under: doi: 10.1093/restud/rdv056

BibTex

@article{Azariadis2016-10SelfF-36282,
  year={2016},
  doi={10.1093/restud/rdv056},
  title={Self-Fulfilling Credit Cycles},
  number={4},
  volume={83},
  issn={0034-6527},
  journal={The Review of Economic Studies},
  pages={1364--1405},
  author={Azariadis, Costas and Kaas, Leo and Wen, Yi}
}

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Bibliography of Konstanz

Yes