Discussion Paper

No. 2013-48 | September 06, 2013
Credit Disruptions and the Spillover Effects between the Household and Business Sectors

Abstract

This paper studies the effects of credit supply disruptions in a dynamic stochastic general equilibrium (DSGE) framework. First, this paper examines the effects of credit supply disruptions in the business sector. The model with financially constrained households generates a bigger decline in aggregate consumption and GDP than the model without financially constrained households. The reason is that the spillover effect from the business sector to the household sector occurs through a labor income channel. With financially constrained households in the model, a collateral channel strengthens the spillover effects and amplifies business cycles. Then this paper examines the effects of credit supply disruptions in the household sector. A tightening of household credit conditions causes a substantial drop in aggregate consumption, which pushes inflation downward. Debt deflation further depresses consumption, labor demand, and investment, altogether generating a sharp decline in GDP.

JEL Classification

E31 E32 E44 G01

Cite As

Rachatar Nilavongse (2013). Credit Disruptions and the Spillover Effects between the Household and Business Sectors. Economics Discussion Papers, No 2013-48, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-48

Assessment



Comments and Questions


Anonymous - Referee Report 1
November 15, 2013 - 10:32

See attached file


Rachatar Nilavongse - Reply to Referee Report 1
January 09, 2014 - 16:29

See attached file


Rachatar Nilavongse - New version of my paper
February 20, 2014 - 20:03

In this new version, I place more emphasis on inflation.