Working Paper: NBER ID: w20617
Authors: Makoto Nakajima; Josvctor Rosrull
Abstract: We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate consumption or aggregate hours worked, and if so, does it matter with respect to the nature of business cycles? No, it does not; in fact, consumption is 20 percent more volatile when credit is available. The interest rate premia increase in recessions because of higher bankruptcy risk discouraging households from using credit. This finding contradicts the intuition that access to credit helps households to smooth their consumption.
Keywords: credit; bankruptcy; business cycles; macroeconomics
JEL Codes: D91; E21; E32; E44; K35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| access to credit (G21) | consumption volatility (E20) |
| bankruptcy filings (K35) | consumption volatility (E20) |
| interest rate premiums during recessions (E43) | access to credit (G21) |
| credit access (G21) | investment volatility (G17) |
| bankruptcy filings (K35) | output (C67) |
| borrowing (G51) | output (C67) |