Endogenous credit and investment cycles with asset price volatility

Francesco Carli*, Leonor Modesto

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)


It is commonly accepted that credit market frictions are an important source of macroeconomic fluctuations. But what is the link between the two? And what is the driving factor of asset prices volatility? To answer these questions, we have introduced a specific credit friction, limited commitment, in a general equilibrium model with production and investment in productive capital, where agents can trade bonds. The model always displays a stationary equilibrium where bonds are traded. More importantly, limited commitment may generate stochastic endogenous fluctuations driven by self-fulfilling volatile expectations (sunspots), yielding credit and investment cycles and bond price volatility consistent with data.
Original languageEnglish
Pages (from-to)1859-1874
Number of pages16
JournalMacroeconomic Dynamics
Issue number7
Publication statusPublished - 1 Oct 2018


  • Credit frictions
  • Indeterminacy
  • Limited commitment
  • Sunspots


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