"Shocks and cycles in the credit market: a Bayesian calibration approach"

ROLAND MEEKS
	Nuffield College, University of Oxford

Abstract:
This paper asks how well a general equilibrium agency cost model describes the
dynamic relationship between credit variables and the business cycle. A Bayesian 
VAR is used to obtain probability intervals for empirical correlations. The 
agency cost model is found to predict the leading, countercyclical correlation 
of spreads with output when shocks arising from the credit market contribute to 
output fluctuations. The contribution of technology shocks is held at 
conventional RBC levels. Sensitivity analysis shows that moderate prior 
calibration uncertainty leads to significant dispersion in predicted
correlations. Most predictive uncertainty arises from a single parameter.

Keywords: agency costs, credit cycles, calibration, shocks.

JEL Classification: C11, C32, E32, E37, E44