Do Credit Constraints Amplify Macroeconomic Fluctuations?


Pengfei Wang

Tao Zha

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2009-28 | December 1, 2009

Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints.

Article Citation

Wang, Pengfei, Tao Zha, and Zheng Liu. 2009. “Do Credit Constraints Amplify Macroeconomic Fluctuations?,” Federal Reserve Bank of San Francisco Working Paper 2009-28. Available at

About the Author
Zheng Liu
Zheng Liu is a vice president and director of the Center for Pacific Basin Studies in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Zheng Liu