Creating Business Cycles Through Credit Constraints

  title={Creating Business Cycles Through Credit Constraints},
  author={Narayana Kocherlakota},
Business cycles appear to be large, persistent, and asymmetric relative to the shocks hitting the economy. This observation suggests the existence of an asymmetric amplification and propagation mechanism, which transforms the shocks into the observed movements in aggregate output. This article demonstrates, in a small open economy, how credit constraints can be such a mechanism. The article also shows, however, that the quantitative significance of the amplification which credit constraints can… CONTINUE READING