The impact of the credit market on business cycles: Financial system development, lending cycles and a model of endogenous fluctuations

This dissertation provides evidence on how the features of credit markets affect the fluctuations in economic activity. The performance of financial institutions has a direct impact on the volatility of business cycles due to the cycles in their lending activities. In addition, financial institutions indirectly affect economic fluctuations as they facilitate the investment and consumption activities of other economic agents. This study shows that as the financial system of a country becomes more developed, economic fluctuations tend to become less volatile. It also shows that these business cycles are directly linked to the cycles in lending activities of commercial banks arising due to the risk behavior of economic agents. Finally, this dissertation indicates that this risk behavior of financial institutions, entrepreneurs and consumers may lead to fluctuations in economic activity even in the absence of exogenous shocks.