This paper argues that self-fulfilling beliefs in credit conditions can generate endogenously persistent business cycle dynamics. We develop a tractable dynamic general equilibrium model with idiosyncratic firm productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dy...

The degree to which you expect others to behave in a trustworthy manner is crucial for your willingness to trust. An interesting question, however, is whether your expectation (if manifested) can affect the likelihood that your trust is repaid. The answer to this question has important implications for the stability of trust (or lack thereof). To observe whether expectations impact the repaymen...

In U.S. data 1981–2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this paper we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing co...