Three essays on credit frictions and business cycle fluctuations

This dissertation studies the effects of credit market frictions to macroeconomy and business cycle fluctuations. Credit market conditions have long been recognized as revealing much about the U.S. business cycles. With the imperfect information in borrowing and lending processes, credit market frictions can amplify and spread the effects of economic shocks. This is considered as financial propagation mechanism. In this dissertation, the first two chapters are the qualitative studies on the credit propagation effects to the investment, production and entry and exit decisions of heterogenous firms. It also reveals how credit frictions together with firm dynamics affect the aggregate economic fluctuations. The third chapter is the empirical study on developing a credit index from several credit indicators to measure credit market conditions and capture the macroeconomic implications of different credit indicators.;Chapter 1 develops a dynamic general equilibrium model in which credit contracts are imperfectly enforceable. In the steady state of this closed economy, firms have different production functions, which cause the differences in their firm sizes. However, I show that the credit constraints can enlarge the heterogeneity of firm size in the steady state and result in a striking difference in response of credit flows to small versus large firms.;Chapter 2 examines firm entry and credit market frictions in a dynamic stochastic general equilibrium model in which firms make different investment and production decisions based on their heterogeneous access to credit. The model implies that the shock propagation mechanism of credit has smaller impact on large firms than on small firms. Furthermore, whether a firm is "larger" or "smaller" is the result of introducing the underlying heterogeneity in production technology and the collateral constraints which embody credit frictions in the economy. Credit frictions lower the number of firms staying in business in the steady state, while increase the volatility of firm entry (or exit) around the steady state. Combining the credit effects on individual firms and the market structure, this paper finds that the more restricted the entry and exit is, the larger the impact of credit frictions on the aggregate economy.;Chapter 3 presents the way of generating a credit conditions index from various credit indicators by estimating a common factor model. It studies the effects of the credit factor shock to macroeconomic fluctuations by examining the impulse response functions and the forecast error decompositions. The results of the historical decomposition imply that credit shock has become more and more important to the economy fluctuations comparing to the traditional macroeconomic shocks. This paper also examines the forecasting power of the credit conditions index and compares it with the forecasting power of different single credit indicators.