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Endogenous Credit Cycles

Chao Gu () and Joseph Haslag ()
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Chao Gu: Department of Economics, University of Missouri, https://economics.missouri.edu/people/gu
Joseph Haslag: Department of Economics, University of Missouri, https://economics.missouri.edu/people/haslag

No 1114, Working Papers from Department of Economics, University of Missouri

Abstract: We build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the timing mismatch is driven by a real shock (i.e., preference shock).

Keywords: liquidity problem; timing mismatch; leveraging; liquidity shock; settlement risk; repurchase agreement; consumption shock (search for similar items in EconPapers)
JEL-codes: E44 E52 G01 (search for similar items in EconPapers)
Pages: 28 pgs.
Date: 2011-09-22
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:1114

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