Economic Theory

, Volume 61, Issue 2, pp 215–239 | Cite as

Credit search and credit cycles

Symposium

Abstract

The supply and demand of credit are not always well aligned, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate. We develop a search-based theory of credit allocations to explain the cyclical fluctuations in both bank reserves and interest spread. We show that search frictions in the credit market can naturally explain the countercyclical bank reserves and interest spread, as well as generate endogenous business cycles driven primarily by the cyclical utilization rate of credit resources, as long conjectured by the Austrian school of the business cycle. In particular, we show that credit search can lead to endogenous local increasing returns to scale and variable capital utilization in a model with constant returns to scale production technology and matching functions, thus providing a microfoundation for the indeterminacy literature of Benhabib and Farmer (J Econ Theory 63(1):19–41, 1994) and Wen (J Econ Theory 81(1):7–36, 1998).

Keywords

Search frictions Credit utilization Credit rationing Self-fulfilling prophecy Business cycles 

JEL Classification

E22 E32 G21 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Antai College of Economics and ManagementShanghai Jiao Tong UniversityShanghaiChina
  2. 2.Department of EconomicsHong Kong University of Science and TechnologyClear Water BayHong Kong
  3. 3.Research DepartmentFederal Reserve Bank of St. LouisSaint LouisUSA
  4. 4.School of Economics and ManagementTsinghua UniversityBeijingChina

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