Working Paper: CEPR ID: DP13795
Authors: Henrik Jensen; Søren Hove Ravn; Emiliano Santoro
Abstract: 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.
Keywords: cost of business cycles; collateral constraints; precautionary saving
JEL Codes: E20; E32; E66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Business cycles (E32) | Improved welfare (I39) |
| Fluctuations in credit market conditions (E44) | Improved welfare (I39) |
| Non-binding credit constraints (E51) | Enhanced consumption smoothing (D15) |
| Business cycles (E32) | Non-binding credit constraints (E51) |