Real Credit Cycles

American Economic Review 2026

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Authors: Pedro Bordalo, Nicola Gennaioli, Andrei Shleifer, Stephen Terry
DOI: 10.1257/aer.20211820
Cited by: 7
References: 93

Abstract

We embed diagnostic expectations in a workhorse neoclassical model with heterogeneous firms and risky debt. A realistic degree of overreaction estimated from US firms’ earnings forecasts generates realistic credit cycles. Good times produce economic and financial fragility, predicting future disappointment of expectations, low bond returns, and investment declines. To generate the size of spread increases observed during 2007–2009, the model requires only moderate negative shocks. Diagnostic expectations offer a realistic, parsimonious way to produce financial reversals in business cycle models. (JEL D84, E13, E22, E32, E44, G12, G32)

Fields of Study & Subjects

Credit Risk and Financial Regulations Italy: Economic History and Contemporary Issues Monetary Policy and Economic Impact

Publication details

Journal / source
American Economic Review
Publisher
American Economic Association
Volume
116
Issue
4
Pages
1274–1308
Publication date
31 March 2026
Language
EN