DP13795 Kinks and Gains from Credit Cycles
|Author(s):||Henrik Jensen, Søren Hove Ravn, Emiliano Santoro|
|Publication Date:||June 2019|
|Keyword(s):||Collateral constraints, Cost of business cycles, precautionary saving|
|JEL(s):||E20, E32, E66|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13795|
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.