Economic Theory

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

Credit search and credit cycles

  • Feng DongEmail author
  • Pengfei Wang
  • Yi Wen


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).


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

JEL Classification

E22 E32 G21 



We benefit from comments by the anonymous referee, Costas Azariadis, Silvio Contessi, Bill Dupor, Francois Geerolf (discussant), Rody Manuelli, Benjamin Pugsley, B. Ravikumar, Yi-Chan Tsai (discussant), José-Víctor R íos-Rull, Harald Uhlig, Randy Wright, Steve Williamson, as well as participants of 2015 ASSA meeting at Boston, the macroseminar at Federal Reserve Bank of St. Louis, the NBER conference on Multiple Equilibria and Financial Crises at Federal Reserve Bank of San Francisco, Tsinghua Workshop in Macroeconomics 2015, and The Fourth HKUST International Workshop on Macroeconomics. The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. The usual disclaim applies.


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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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