Working paper
Real credit cycles
- Abstract:
- We incorporate diagnostic expectations into a workhorse neoclassical business cycle model with heterogeneous firms and risky debt. A realistic degree of diagnostic overreaction estimated from US firm forecasts generates economic fragility during good times, countercyclical credit spreads, and boom-bust credit cycles at the firm and aggregate levels. Good times predict future disappointment, spread increases, low bond returns, and investment declines. To generate the size of spread increases observed during 2008-9, the model requires only disappointment of overoptimistic beliefs rather than large negative shocks. Diagnostic expectations offer a realistic, parsimonious way to produce financial reversals in business cycle models.
- Publication status:
- Published
Actions
Access Document
- Files:
-
-
(Preview, Version of record, pdf, 618.3KB, Terms of use)
-
- Publisher copy:
- 10.3386/w28416
- Publication website:
- https://www.nber.org/papers/w28416
Authors
- Publisher:
- National Bureau of Economic Research
- Series:
- NBER Working Papers
- Publication date:
- 2021-01-01
- DOI:
- Paper number:
- 28416
- Language:
-
English
- Pubs id:
-
1185470
- Local pid:
-
pubs:1185470
- Deposit date:
-
2024-09-04
- ARK identifier:
Terms of use
- Copyright holder:
- Bordalo et al
- Copyright date:
- 2021
- Rights statement:
- © 2021 by Pedro Bordalo, Nicola Gennaioli, Andrei Shleifer, and Stephen J. Terry. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
If you are the owner of this record, you can report an update to it here: Report update to this record