This thesis is a theoretical study of the role of credit market imperfections in business cycle dynamics. In particular, Chapters 2 to 4 focus on the credit channel of the monetary transmission mechanism, while Chapter 5 studies the role of shocks to credit markets in generating business cycle dynamics. The common framework used throughout the thesis is a New Keynesian (NK) framework characterised by imperfect competition and staggered pricesetting.\ud The essence of the credit channel of monetary transmission is endogenous movements in the external finance premium, which, in turn, are caused by endogenous movements of agency costs generated in the presence of credit frictions. The credit channel works to complement the interest rate channel inherent to the standard NK model.\ud Chapter 2 aims to shed light on the workings of the credit channel by presenting an analytical solution for the simpli�ed case where agency costs are modelled acyclical. I show that when acyclical agency costs are incorporated into an otherwise standard NK model, they amplify the real impact of money shocks but reduce the persistence of the real effects. This happens because credit frictions flatten both aggregate supply (AS) and aggregate demand (AD) relations of the model, where the former is essentially the New Keynesian Phillips curve while the latter is derived from the consumption Euler equation and money market equilibrium condition.\ud Chapter 3 replaces the assumption of economy-wide input markets made in Chapter 2 with the one of segmented input markets. The reason for doing this is twofold. First, the latter assumption seems to capture the reality better. Second, the previous literature shows that the segmented market assumption is a crucial determinant for the degree of the persistence of the real effects of money shocks. I show that for given agency costs, both the real impact of money shocks and the persistence of the real effects are much greater in a model with the segmented input market assumption. This happens because the new assumption greatly flattens the AS curve.\ud Chapter 4 directly studies the workings of the endogenous agency costs. Focusing on credit frictions in borrowing by firms (entrepreneurs), it compares the different business cycle dynamics generated by two alternative modelling strategies. The first assumes that entrepreneurs make a consumption/saving decision to maximise their intertemporal utility, but have a higher discount rate than households (original lenders). The second assumes that a constant fraction of entrepreneurs die each period and they consume all the accumulated wealth just before their death. These assumptions are widely used in the literature to keep agency costs operative. I show that the choice of the modelling strategies is key to the way the credit channel operates within the NK framework.\ud Chapter 5 investigates the effect of shocks to credit markets on business cycle dynamics. Using the framework developed in Chapter 2, I show that shocks to credit markets affect agency costs and thus the external finance premium faced by entrepreneurs (borrowers). In turn, this causes a change in output. Then, turning to the framework developed in Chapter 4 with endogenous agency costs, I highlight that there is a feedback effect from macroeconomic conditions to the premium through endogenous developments in entrepreneurs' net worth. The change in the premium caused by the feedback effect leads to the further change in output
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