No. 229 Expectation Driven Business Cycles with Limited Enforcement

by Karl Walentin


April 2009 (updated August 2012)



We explore the implications of shocks to expected future productivity. In a setting with limited enforcement of financial contracts, firms have to post collateral to obtain external finance. In a real one-sector model with this type of "collateral constraint", positive news about future productivity implies an increase in stock prices and a relaxation of financing constraints that yield a general economic expansion, i.e. an expectation-driven business cycle. Furthermore, these properties are obtained with standard consumption preferences and capital adjustment costs.



business cycles, news shocks, limited enforcement, stock prices


JEL codes

E22, E32, E44, E51

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