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ON THE CYCLICALITY OF CREDIT

Published online by Cambridge University Press:  15 February 2013

Ufuk Devrim Demirel
Ufuk Devrim Demirel*
Affiliation:
University of Colorado at Boulder
*
Address correspondence to: Ufuk Devrim Demirel, University of Colorado at Boulder, Department of Economics, 256 UCB, Boulder, CO, 80309, USA, e-mail: demirel@colorado.edu.
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Abstract

This study documents the cyclical properties of business credit in the United States and in the Euro area and constructs a theoretical model that can successfully replicate the observed characteristics. I find that real business loans lag output; i.e., business credit is more strongly correlated with past output than with current output. Furthermore, real business loans correlate negatively with future output and investment and positively with past output and investment. I show that a fairly standard model of business and credit fluctuations with agency costs can neither generate the lagging behavior of business credit nor induce the observed cross-correlation patterns of output, investment, and business loans. I introduce a costly financial intermediation mechanism into an otherwise standard macroeconomic framework and show that the evolution of intermediary balance sheets and the interaction of intermediation and agency costs can induce the observed regularities.

Keywords

Financial IntermediationBusiness LoansBoom–Bust Cycles
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 5 , July 2014 , pp. 1129 - 1160
Copyright
Copyright © Cambridge University Press 2013 

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