Rolled-over Credit Cycles; Dr Donghai ZHANG (University of Bonn)

Abstract

Canonical macroeconomic and financial models require credit to be equal to its fundamental component, i.e., the net present value of the net flows to creditors. According to this conventional view, credit booms are expected to precede increased flows to creditors. However, data suggests the opposite. To rationalize the novel empirical findings, we develop a model with financial frictions and heterogeneous firms, allowing firms to roll over a fraction of credits indefinitely. We show that an increase in indefinite rollover credit raises the aggregate credit and output while depressing the credit's fundamental component through firms' precautionary savings.