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Real Credit Cycles

Pedro Bordalo et al.

The American Economic Review2026https://doi.org/10.1257/aer.20211820article
FT50AJG 4*ABDC A*
Weight
0.50

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)

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https://doi.org/https://doi.org/10.1257/aer.20211820

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@article{pedro2026,
  title        = {{Real Credit Cycles}},
  author       = {Pedro Bordalo et al.},
  journal      = {The American Economic Review},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1257/aer.20211820},
}

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Real Credit Cycles

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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