Empirical evidence demonstrates that credit standards, including lending margins and collateral requirements, move in a countercyclical direction. In this study, we construct a small open economy model with financial frictions to generate the countercyclical movement in credit standards. Our...

We introduce a novel measure of uncertainty that is based on a business survey in which firms are asked directly how certain or uncertain they are. So far the literature has tried to capture economic uncertainty indirectly by means of expectation errors or the extent of disagreement. Our direct...

This paper proposes and tests a theory of credit-driven asset bubbles which are neutral in their real effects. When a lender such as a government, central bank, or banking sector is willing to lend infinitely against collateral, explosive asset bubbles can form which exactly offset a bubble in...

This paper employs a stylized New Keynesian DSGE model for a monetary union to analyze whether cyclical inflation differentials can be explained by cross-country differences concerning the characteristics of financial markets. Our results suggest that empirically plausible degrees of...

Motivated by the apparent failure of the credit multiplier mechanism (CM) to deliver amplification in DSGE models, we re-examine its role in business cycles to address the question: is something wrong with the CM? Our answer is no. In coming to this answer we construct a model with reproducible...

We show that in a model with equity and debt financing, the specfication of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and...

This paper develops a two-country DSGE model for a monetary union in which each country is populated by two types of households - savers and borrowers - and two types of production sectors - a consumption goods sector and a housing sector. Households trade nominal private debt in equilibrium,...

This paper studies the welfare properties of competitive equilibria in an economy with incomplete markets subject to idiosyncratic and aggregate shocks. We focus on the role of securitization, whereby borrowers can reduce idiosyncratic asset risk, which enables increased leverage and investment....

The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house prices fuels optimism (pessimism) and...

We explore the intertwined dynamics of asset prices and the macroeconomy in a Behavioural model of Credit Cycles (BCC) characterized by a credit friction à la Kiyotaki and Moore and heterogeneous expectations cum heuristic switching à la Brock and Hommes. This behavioural approach allows to...