A credit cycle model with market sentiments

Ingrid Kubin (), Thomas O. Zörner, Laura Gardini () and Pasquale Commendatore
Authors registered in the RePEc Author Service: Thomas O. Zoerner

Structural Change and Economic Dynamics, 2019, vol. 50, issue C, 159-174

Abstract: This paper extends Matsuyama's endogenous credit cycle model to account for recent findings on the role of credit market sentiments. The benchmark model uses a parsimonious financial friction specification in the form of a pledgeability parameter, which indicates how much of the revenue borrowers can pledge for credit. We endogenize this parameter by introducing behavioral aspects of credit markets. Depending on the current level of net worth the credit market sentiment may change. If a critical net worth threshold is passed, a switch from an optimistic to a pessimistic regime occurs. Lenders’ perception of risk and the pledgeability parameter will vary accordingly. The resulting dynamic law of motion is two-dimensional and discontinuous. We show that switching between beliefs fundamentally affects the stability of the system confirming that changes in credit market sentiments drive volatility. However, we also find instances in which behavioral regime switches have a stabilizing effect.

Keywords: Credit cycles; Financial frictions; Market sentiments; Behavioral inertia (search for similar items in EconPapers)
JEL-codes: E32 E44 G41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0954349X19301109
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:50:y:2019:i:c:p:159-174

DOI: 10.1016/j.strueco.2019.06.006

Access Statistics for this article

Structural Change and Economic Dynamics is currently edited by F. Duchin, H. Hagemann, M. Landesmann, R. Scazzieri, A. Steenge and B. Verspagen

More articles in Structural Change and Economic Dynamics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().