In recent decades, after liberalizing their credit markets emerging economies have frequently experienced sustained output growth but also large volatility of output and asset (e.g., real estate) prices. This paper studies an economy where firms face credit constraints tied to the pledgeable...

recapitalizing or by deleveraging. By deleveraging, banks transform the initial redistribution shock into a classic credit crunch, and amplify and propagate the fi…nancial shock to the real economy. In my benchmark experiment, credit losses (that is, a redistribution shock) of about 4% of GDP...