A Behavioral Model of the Credit Cycle

Annicchiarico BarbaraSurricchio SilviaWaldmann Robert J.
CEIS Research Paper
In a behavioral variant of a New Keynesian model, in which individuals use simple heuristic rules to forecast future in ation and output gap, if there are limits on the amount of debt that economic agents are allowed to bear, we observe occasionally severe downturns. Differences in beliefs combined with borrowing constraints tend to dampen expansions, but give rise to a chain reaction that exacerbates the recessions. The model is an example of endogenous credit cycles with expansions, severe recessions, and persistent inequality in the distribution of wealth. Monetary policy can both stabilize the economy and cause increased average output.

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Number: 446
Keywords: Credit cycle, heuristic rules, monetary policy
JEL codes: E10,E32,D83
Volume: 16
Issue: 8
Date: Tuesday, October 30, 2018
Revision Date: Tuesday, October 30, 2018