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March/April 2009, 
Vol. 91, No. 2
Posted 2009-03-02

Firm Volatility and Credit: A Macroeconomic Analysis

by Leo Kaas

This article examines a tractable real business cycle model with idiosyncratic productivity shocks and binding credit constraints on entrepreneurs. The model shows how firm volatility increases in combination with credit market development. It further generates the observed comovement of credit and firm volatility with output at business cycle frequencies in response to aggregate productivity shocks.