This paper develops a simple neoclassical model of the business cycle in which condition of borrowers' balance sheets is a source of output dynamics. The mechanism is that higher borrower net worth reduces the agency costs of financing real capital investments. Business upturns improve net worth, lower agency costs, and increase investment, which amplifies the upturn; vice versa, for downturns. Shocks that affect net worth (as in a debt-deflation) can initiate fluctuations.
|Original language||English (US)|
|Number of pages||18|
|Journal||American Economic Review|
|State||Published - Mar 1989|
ASJC Scopus subject areas
- Economics and Econometrics