Discussion Paper Details

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Title: Kinks and Gains from Credit Cycles

Author(s): Henrik Jensen, Søren Hove Ravn and Emiliano Santoro

Publication Date: June 2019

Keyword(s): Collateral constraints, Cost of business cycles and precautionary saving

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Jensen, H, Ravn, S and Santoro, E. 2019. 'Kinks and Gains from Credit Cycles'. London, Centre for Economic Policy Research.