Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153177
Authors: 
Mendicino, Caterina
Year of Publication: 
2007
Series/Report no.: 
ECB Working Paper 743
Abstract: 
This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data.
Subjects: 
asset prices
credit frictions
reallocation of capital
JEL: 
E21
E22
E44
G20
Document Type: 
Working Paper

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