Title: Nonlinear credit dynamics and regime switches in the output gap
Authors: Willi Semmler - New School for Social Research (United States)
Francesco Simone Lucidi - Sapienza University (Italy) [presenting]
Abstract: Over the last two decades the intensity of credit standards' tightening during economic contractions has exceeded their easing during expansions among euro area banks. This mechanism is fed by the boom-bust cycle of credit that is linked to financial instability with large effects on the real economy. We build a small scale nonlinear quadratic (NLQ) model to study how credit feedback can affect the overall adjustment path of the economy towards some steady state, when the central bank solves a finite-horizon decision problem. This source of instability in the transmission mechanism is identified in a non linear VAR with time-varying volatility estimated on the euro area.