Endogenous Credit Cycles, Heterogeneous Expectations and Sustainable Economic Development

Project Details

Financing body

Oesterreichische Nationalbank (Jubiläumsfonds)


We propose a number of interesting extensions to Matsuyama's (2013, 2015) model of endogenous credit cycles, that improve our understanding of the linkages between stable macroeconomic development, economic growth and financial stability. The original model framework is an OLG-setting with heterogeneous investment projects, which have different propensities to generate pecuniary externalities, coupled with credit market imperfections, eventually causing irregular endogenous cyclicity. We plan to augment the model with different expectational regimes, explicitly substituting the assumption of agent's perfect foresight with different expectation hypotheses, using a learning-to-forecast approach. Further, we plan to introduce technological progress into the existing framework, to highlight the interplay of the financial cycle with growth. Finally, we aim to make the model more apt for quantitative analysis and policy design, ultimately bringing the model to the European (Austrian) data. Our results are expected to contribute significantly to the policy discussion on sustainable economic development strategies especially for endogenously unstable financial markets.
Effective start/end date1/01/1631/12/19