Discussion paper

DP13795 Kinks and Gains from Credit Cycles

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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Citation

Jensen, H, S Ravn and E Santoro (2019), ‘DP13795 Kinks and Gains from Credit Cycles‘, CEPR Discussion Paper No. 13795. CEPR Press, Paris & London. https://cepr.org/publications/dp13795