Work

Do Credit Constraints Amplify Macroeconomic Fluctuations?

Year: 2009

Type: article

Abstract: Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints.

Source: Federal Reserve Bank of San Francisco, Working Paper Series

DOI: 10.24148/wp2009-28

Authors: Federal Reserve Bank of San Francisco, Zheng Liu, Pengfei Wang, Tao Zha, Federal Reserve Bank of Atlanta

Institutions: University of California, Riverside, Federal Reserve Bank of Atlanta, Federal Reserve, University of California, Los Angeles, Georgetown University, University of California, Santa Cruz, University of California, Davis, University of Pennsylvania

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

OpenAlex ID: W2901499413

FWCI: 6.472

Cites: 77

Cited by: 16

Related to: 10