Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-10T16:49:39.611Z Has data issue: false hasContentIssue false
  • English
  • Français

EXPECTATION ERRORS IN CREDIT MARKET AND BUSINESS CYCLES

Published online by Cambridge University Press:  30 June 2016

Kenichi Tamegawa  and
Shin Fukuda
Kenichi Tamegawa*
Affiliation:
Yamagata University
Shin Fukuda
Affiliation:
Fukushima University
*
Address correspondence to: Kenichi Tamegawa, Faculty of Literature and Social Sciences, Yamagata University, Kojirakawa-machi, Yamagata-shi, Yamagata 990–8560, Japan; e-mail: tamegawa@human.kj.yamagata-u.ac.jp.
Get access Rights & Permissions [Opens in a new window]

Abstract

This study demonstrates how expectation errors in a credit market generate economic fluctuations. To this end, we employ simulation analysis using a dynamic stochastic general equilibrium model. Our model includes two building blocks that are not included in the standard models: the banking sector and matching friction in the labor market. By introducing the banking sector, we can confirm that if economic agents fallaciously expect a rise in future asset prices, such expectations will cause an economic boom and bust. The variation of this fluctuation is quite large and the recession short-lived, but these drawbacks can be avoided by adding matching friction.

Keywords

Expectation ErrorsNews ShockBusiness CycleBank CapitalUnemployment
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1359 - 1380
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Aikman, D. and Paustian, M. (2006) Bank Capital, Asset Prices and Monetary Policy. Bank of England working paper 305.Google Scholar
Beaudry, P. and Portier, F. (2004) An exploration into Pigou's theory of cycles. Journal of Monetary Economics 51, 1183–1216.Google Scholar
Beaudry, P. and Portier, F. (2007) When can changes in expectations cause business cycle fluctuation in neo-classical settings? Journal of Economic Theory 135, 458–477.Google Scholar
Bernanke, B., Gertler, M., and Gilchrist, S. (1999) The financial accelerator in a quantitative business cycle framework. In Taylor, J. and Woodford, M. (eds.), Handbook of Macroeconomics, Vol. 1C, pp. 1343–1393. Amsterdam: Elsevier.Google Scholar
Calvo, G. (1983) Staggered price setting in a utility-maximizing framework. Journal of Monetary Economics, 12, 383–398.Google Scholar
Christiano, L., Eichenbaum, M., and Evans, C. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.Google Scholar
Christiano, L., Ilut, C., Motto, R., and Rostagno, M. (2008) Monetary Policy and Stock Market Boom–Bust Cycles. European Central Bank working paper 955.Google Scholar
Costain, J.S. and Reiter, M (2008), Business cycles, unemployment insurance, and the calibration of matching models. Journal of Economic Dynamics and Control 4, 120–155.Google Scholar
Den Haan, W.J. and Kaltenbrunner, G. (2005) Growth Expectations and Business Cycles. Mimeo, London Business School.Google Scholar
Den Haan, W.J. and Kaltenbrunner, G. (2009) Anticipated growth and business cycles in matching models. Journal of Monetary Economics 56, 309–327.Google Scholar
di Pace, F. and Faccini, R. (2010) Deep Habit and the Cyclical Behavior of Equilibrium Unemployment and Vacancies. Bank of England working paper 391.Google Scholar
Gerali, Andrea, Neri, Stefano, Sessa, Luca, and Signoretti, Federico M. (2010) Credit and banking in a DSGE model of the Euro Area. Journal of Money, Credit and Banking 42 (s1), 107–141.Google Scholar
Gertler, M. and Kiyotaki, N. (2010) Financial intermediation and credit policy in business cycle analysis. In Friedman, B. and Woodford, M. (eds.), Handbook of Monetary Economics. Amsterdam: Elsevier.Google Scholar
Gertler, M. and Trigari, A. (2009) Unemployment fluctuations with staggered Nash wage bargaining. Journal of Political Economy 117, 38–86.Google Scholar
Hagedorn, M. and Manovskii, I. (2008) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98, 1692–1706.Google Scholar
Hall, R. (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95, 50–65.Google Scholar
Jaimovich, N. and Rebelo, S. (2009) Can news about the future drive the business cycle? American Economic Review 99, 1097–1118.Google Scholar
Justiniano, A., Primiceri, G.E., and Tambalotti, A. (2010) Investment shocks and business cycles. Journal of Monetary Economics 57, 132–145.Google Scholar
Kennen, J. (2010) Private information, wage bargaining and employment fluctuations. Review of Economic Studies 77, 633–664.Google Scholar
Meh, C. and Moran, K. (2004) Bank Capital, Agency Costs, and Monetary Policy. Bank of Canada working paper 2004–6.Google Scholar
Meh, C. and Moran, K. (2010) The role of bank capital in the propagation of shocks. Journal of Economic Dynamics and Control 34, 555–576.Google Scholar
Monacelli, T., Perotti, R., and Trigari, A. (2010) Unemployment fiscal multipliers Journal of Monetary Economics 57, 531–553.Google Scholar
Mortensen, T. and Pissarides, C. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61, 397–415.CrossRefGoogle Scholar
Pissarides, C. (2000) Equilibrium Unemployment Theory, 2nd ed.Cambridge, MA: The MIT Press.Google Scholar
Ravn, M., Schmitt-Grohe, O.S., and Uribe, M. (2006) Deep habit. Review of Economic Studies 73, 195–218.Google Scholar
Repullo, R. and Suarez, J. (2004) Loan pricing under Basel capital requirements. Journal of Financial Intermediation 13, 41–55.Google Scholar
Rudanko, L. (2009) Labor market dynamics under long-term wage contracting. Journal of Monetary Economics 56, 170–183.Google Scholar
Schmitt-Grohe, S. and Uribe, M. (2008) What's News in Business Cycles. NBER working paper 14215.Google Scholar
Shimer, R. (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95, 25–49.Google Scholar
Shimer, R. (2010) Labor Markets and Business Cycles, Vol. 3A, pp. 547–599. Princeton, NJ: Princeton University Press.Google Scholar
Tamegawa, K. and Fukuda, S. (2010) The effects of expectation errors in credit market on business cycles. JCER Economic Journal (Nihon Keizai Kenkyu) N63, 58–78 [in Japanese].Google Scholar
Uhlig, H. (1999) A toolkit for analyzing nonlinear dynamic stochastic model easily. In Marimon, R. and Scott, A. (eds.), Computational Methods for the Study of Dynamic Economies, pp. 30–61. Oxford, UK: Oxford University Press.Google Scholar