This paper investigate how the degree of credit market development is related to business cycle fluctuations in industrialized countries.
I show that a business cycle model with collateral constraints generate a negative relation between the volatility of the cyclical component of output and the size of the credit market. I dentify the reallocation of
capital as the key element in shaping out this relation. According to the model, more credit to the private sector makes output less sensitive to
productivity shocks. Thus, the amplification role of credit frictions in the propagation of productivity shocks to output is greater in economies with higher degrees of credit rationing. I confront the prediction of the
model with a panel of OECD countries over the last 20 years. Empirical evidence confirms that countries with a more developed credit market
experience smoother fluctuations. Moreover, a greater size of the credit market dampens the propagation of productivity shocks to output and
collateral constraint, reallocation of capital, asset prices
This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data. JEL Classification: E21, E22, E44, G20.
Credit frictions, reallocation of capital, asset prices.
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.