Changing Credit Limits, Changing Business Cycles
Research output: Working paper › Research
In the last decades, capital markets across the industrialized world have undergone massive deregulation, involving increases in the loan-to-value (LTV) ratios of households and firms. We study the business-cycle implications of this phenomenon in a dynamic general equilibrium model with multiple credit-constrained agents. Starting from low LTV ratios, a progressive relaxation of credit constraints leads to both higher macroeconomic volatility and stronger comovement between debt and real variables. This pattern reverses at LTV ratios not far from those currently observed in many advanced economies, since credit constraints become non-binding more often. As expansionary shocks may make credit constraints non-binding, while contractionary shocks cannot, recessions become deeper than expansions. The non-monotonic relationship between credit market conditions and macroeconomic fluctuations poses a serious challenge for regulatory and macroprudential policies.
Original language | English |
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Place of Publication | London |
Publisher | Centre for Economic Policy Research, CEPR |
Number of pages | 56 |
Publication status | Published - Feb 2015 |
Series | CEPR Discussion Paper Series |
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Number | 10462 |
Volume | 2015 |
Bibliographical note
JEL Classification: E32, E44
- Faculty of Social Sciences - E32, E44
Research areas
Links
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2572460
Submitted manuscript
ID: 144790517