School of Economics

2009 Discussion Papers

School of Economics Discussion Paper 09/04
March 2009

Credit Supply and Output Volatility

Cristiano Cantore and Mathan Satchi

School of Economics
University of Kent

Abstract:

The link between aggregate profits and investment has been widely analysed
through the impact of profits on net worth and therefore the firm’s ability to borrow,
in the presence of credit market imperfections. How the business cycle is
affected if profits also affect investment through an impact on savings and therefore
the intermediary’s ability to lend, is the topic of this paper. We find that the fluctuations
in the supply of credit that result from this may significantly amplify output
responses to shocks in comparison to a situation where the net worth mechanism
operates alone.

JEL Classification: E32, E544, E51

Keywords: Business Cycles, Credit Market Imperfections, Loan Supply

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