Kinks and Gains from Credit Cycles

Research output: Working paperResearch

Abstract

Credit-market imperfections are at the centre stage of several theories of business fluctuations. Since a lot of research seeks to address the welfare consequences of stabilization policies, we revisit the fundamental question of quantifying the cost of business cycles in a model where household borrowing is subject to a collateral constraint. Business cycles occasionally change the credit-market conditions, making households temporarily unconstrained and better off. This effect can dominate the conventional losses from uncertainty, thus making fluctuations welfare-dominate certainty.
Original languageEnglish
Number of pages27
Publication statusPublished - 29 Jul 2019
SeriesCEPR Discussion Paper Series
NumberDP13795

Keywords

  • Faculty of Social Sciences
  • Collateral constraints
  • Cost of business cycles
  • precautionary saving

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