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    Credit markets, intermediate production and the business cycle

    Samiri, Issam (2021) Credit markets, intermediate production and the business cycle. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    This paper builds an RBC model with an endogenous mechanism for firm defaults and credit spreads. The model assumes a productive sector made of a class of intermediate producers and a class of final producers. The intermediate producers borrow to fund their operations and can default when large enough negative shocks affect their revenues. The intermediate/final production structure implies that during periods of low economic activity, the demand for the intermediate good is lower. This depresses the price of the intermediate good and in turn depresses the revenues of the borrowing firms. Hence, higher default rates during the lows of the business cycle. Inversely, default rates are lower when the economy is improving: default rates are countercyclical. Intermediate producers are financed by banks that take future defaults into account when setting lending rates. This guarantees that credit spreads are countercyclical too.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BCAM Working Paper #2101. ISSN: 1745-8587
    Keyword(s) / Subject(s): RBC, Credit, Credit Spreads, Financial Frictions
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Isobel Edwards
    Date Deposited: 29 Mar 2021 15:44
    Last Modified: 22 Jun 2021 21:19
    URI: https://eprints.bbk.ac.uk/id/eprint/42576

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    • Credit markets, intermediate production and the business cycle. (deposited 29 Mar 2021 15:44) [Currently Displayed]

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