College of Liberal Arts
Unemployed households' access to unsecured revolving credit (credit cards) increased from 13 percent to 45 percent over the last three decades. This project analyzes how this large increase in revolving credit has impacted the business cycle. The main quantitative result is that business cycles are deeper and employment recoveries are exacerbated in periods of persistently increasing credit access, but in the long run, when credit growth slows, business cycles return to normal when measured by the timing and depth of the trough of employment.
The researchers are computing Bellman equations (dynamic programming problems) that describe how various labor and credit markets work. Solving these Bellman equations using standard grid methods is computationally demanding, but it must be done since the functions being solving for are kinked, non-convex, and typically hard to characterize using faster methods.