Discussion Paper Series 2009-E-30

Chained Credit Contracts and Financial Accelerators

Naohisa Hirakata, Nao Sudo, Kozo Ueda

Based on the financial accelerator model of Bernanke et al. (1999), we develop a dynamic general equilibrium model for a chain of credit contracts in which financial intermediaries (hereafter FIs) as well as entrepreneurs are subject to credit constraints. Financial intermediation takes place through chained-credit contracts, lending from the market to FIs, and from FIs to entrepreneurs. Calibrated to U.S. data, our model shows that the chained credit contracts enhance the financial accelerator effect, depending on the net worth distribution across sectors: (1) our model reinforces the effects of the net worth shock and the technology shock, compared with a model that omits the FIs' credit friction a la Bernanke et al. (1999); (2) the sectoral shock to FIs has a greater impact than the sectoral shock to entrepreneurs; and (3) the redistribution of net worth from entrepreneurs to FIs reduces the amplification of the technology shock. The key features of the results arise from the asymmetry of the two borrowing sectors: smaller net worth and larger bankruptcy costs of FIs relative to those of entrepreneurs.

Keywords: Chain of Credit Contracts; Net Worth of Financial Intermediaries; Cross-sectional Net Worth Distribution; Financial Accelerator effect

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2009 Bank of Japan All Rights Reserved.

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