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Endogenous credit and investment cycles with asset price volatility

journal contribution
posted on 2018-10-01, 00:00 authored by Francesco CarliFrancesco Carli, L Modesto
It is commonly accepted that credit market frictions are an important source of macroeconomic fluctuations. But what is the link between the two? And what is the driving factor of asset prices volatility? To answer these questions, we have introduced a specific credit friction, limited commitment, in a general equilibrium model with production and investment in productive capital, where agents can trade bonds. The model always displays a stationary equilibrium where bonds are traded. More importantly, limited commitment may generate stochastic endogenous fluctuations driven by self-fulfilling volatile expectations (sunspots), yielding credit and investment cycles and bond price volatility consistent with data.

History

Journal

Macroeconomic dynamics

Volume

22

Issue

7

Season

Special Issue

Pagination

1859 - 1874

Publisher

Cambridge University Press

Location

Cambridge, Eng.

ISSN

1365-1005

eISSN

1469-8056

Language

eng

Publication classification

C1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2017, Cambridge University Press

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