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Abstract

Vol. 62, No. 1, pp. 57-65 (2011)

“Search and Matching in Loan Market and Real Business Cycle--The Case of Japan--”
Hyung Seok (Eric) Keam (Department of Economics, Sogang University), Yuki Teranishi (Financial Systems and Bank Examination Department, Bank of Japan)

In this paper, we extend a real business cycle model to incorporate multi-period contracts and incomplete financial markets with search and matching friction between firms and private banks in a loan market. The model with these features can reduce pro-cyclicality (or even produce counter-cyclicality) between the real economy and the financial market, and so can induce sluggish response of the financial market to the real economy. Simulation results show that the model can explain not only the business cycle behaviors of real variables, such as consumption, investment, wage, and labor supply, but also of financial variables, such as loan volume and interest rates.