Macroeconomic Implications of Credit Constraints

Private credit plays a critical role in the real economy. The provision of credit to businesses reduces the need for internal finance and promotes investment, for households it reduces consumption volatility. While both businesses and households rely on bank credit, prior literature emphasizes production and investment and does not distinguish between household and business credit. The effects of credit conditions need not be confined to firms and capital spending but may arise through household spending decisions as well. Certainly, the distinction becomes important when the credit conditions for the two types of credit have distinct effects on the real economy. This dissertation differentiates between household and business credit and studies the implications of the two types of credit, from both theoretical and empirical points of views. The first chapter examines the impact of international and domestic credit market frictions on the relative consumption volatility differential between developed and emerging countries by modeling household and business credit effects explicitly. The second chapter uses a unique data set for household and business credit and studies the effects of household and business credit on the trade balance. The third chapter analyzes the link between financial crises and private credit decomposition.