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Title: Endogenous Cycles in a Stiglitz-Weiss Economy

Author(s): Javier Suarez and Oren Sussman

Publication Date: March 1997

Keyword(s): Credit Rationing and Endogenous Cycles

Programme Area(s): Financial Economics

Abstract: The literature on financial imperfections and business cycles has focused on propagation mechanisms. In this paper we model a pure reversion mechanism, such that the economy may converge to a two-period equilibrium cycle. This mechanism confirms that financial imperfections may have a dramatic amplification effect. Unlike some related models, contracts are complete. Indexation is not assumed away. The welfare properties of a possible stabilizing policy are analysed. The model itself is a dynamic extension of the well-known Stiglitz-Weiss model of lending under moral hazard. Although stylized, the model still captures some important features of credit cycles.

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Bibliographic Reference

Suarez, J and Sussman, O. 1997. 'Endogenous Cycles in a Stiglitz-Weiss Economy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1604